EmailIt pangs us to say this, but the market continues to be preoccupied with Europe and specifically sovereign bond yields in the eurozone. We needn't say more just yet, but with the S&P futures trading 0.4% below fair value, it is safe to say our astute readers know where we are headed.
The relief over the change in leadership in Italy appears to be short lived. The yield on the Italian 10-year note sported a seven handle on it once again (now 6.93%). Spain's 10-year note is at 6.26% and rising following a costly auction of 12-month and 18-month bills. France's 10-year is at 3.66%, but more to the point, its spread to the German bund has reached an unnerving 190 basis points.
Widening credit spreads reflect a belief that current proposals for preventing a systemic crisis are inadequate.
Whether more gets done remains to be seen, but if current trends persist in these credit markets, equity markets will struggle to make headway.
On that note, European bourses are mostly lower at this juncture, as the action in the credit markets and a report that eurozone GDP was up 0.2% in the third quarter has left buyers in a guarded state.
The U.S. market is due to follow their lead when trading begins, although there isn't a clear-cut strain of negativity.
The U.S. Dollar Index is up (+0.5%) and the Treasury market is showing some strength (10-yr note +7/32 at 2.04%), yet their current standing does not reflect full-scale risk aversion like we have seen on some other days in response to the happenings in Europe.
Good earnings news and reassuring guidance from Home Depot (HD) has helped things, but Wal-Mart (WMT) missing the Capital IQ consensus estimate by a penny has been a disappointment.
Still, there are other offsets to the negativity in Europe, namely the economic releases out of the U.S. today, which were all better than expected.
The Retail Sales report for October was the most welcome surprise, not to mention yet another indication that the U.S. economy is remaining above the recession fray.
Led by increases in most sectors, retail sales increased 0.5% in October (Briefing.com consensus +0.4%). Excluding autos, retail sales jumped 0.6% (Briefing.com consensus +0.2%).
Electronics and appliance stores (+3.7%) saw the biggest jump in sales followed by building materials and garden and equipment supplies dealers (+1.5%) and nonstore retailers (+1.5%). Department stores (-1.2%) saw the biggest decline versus September and were followed by clothing and accessories (-0.7%), furniture and home furnishings (-0.7%), and gasoline stations (-0.4%).
Core retail sales, which exlude auto, gasoline station, and building materials sales, were up a robust 0.6% and will be a positive input for the PCE component of Q4 GDP.
The inflation data also proved encouraging, with total PPI declining 0.3% (Briefing.com consensus -0.2%) and core PPI, which excludes food and energy, checking in flat (Briefing.com consensus +0.1%).
A 1.4% drop in the index for finished energy goods paced the overall decline; meanwhile, higher prices for pharmaceutical preparations and civilian aircraft offset lower prices for light motor trucks and passenger cars to leave the core rate unchanged. Core PPI, however, had increased every month for the past ten months, so this a favorable inflation reading.
Similarly, the Empire State manufacturing survey for November was also favorable, as it moved back into an expansion phase at 0.6 (Briefing.com consensus -0.8) versus -8.48 in October.
The futures market steadied itself in the wake of the economic data out of the U.S., but Europe remains the focal point at this juncture.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
