Investors await retail earnings to assess strength of recovery

New York: As unemployment in the United States edges above 10 per cent, anxious investors will look to earnings reports from major retailers for signs of life in the beaten-up consumer.

Comments from Wal-Mart Stores, the world's largest retailer, as well as from a host of smaller stores, will be of vital importance to investors trying to judge the recovery's pace.

"The best way of gaining an insight into the consumer is from hearing from the companies that sell to them," said Peter Boockvar, equity strategist at Miller Tabak & Company in New York.

Stocks are up 50 per cent since the lows in March, but the market has languished recently as investors try to determine the strength of the economic recovery.

"Fundamentals and valuation pretty much fully reflect reality so now we have to rely on liquidity, momentum and psychology to help guide the direction," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Not surprisingly, discount retailers are expected to do better. Wal-Mart and Kohls are both expected to post slightly better third-quarter earnings than a year ago.

Rising earnings

Wal-Mart should see earnings of 81 cents per share, compared with 77 cents a year earlier, when it reports results on Thursday, according to analysts polled by Thomson Reuters. Kohls also will give its quarterly scorecard on Thursday.

Higher-end department stores probably won't fare as well as their discount cousins. Macy's is expected to see third-quarter losses widen on Wednesday and JC Penney's profit is likely to be down sharply when it reports results on Friday.

What these companies, and especially Wal-Mart, say about the future will potentially overshadow profit figures.

Top-line revenue performance will be key in judging to what extent business is creeping back.

October retail chain sales showed half of retailers fell short of Wall Street's expectations — another blow for hopes of a widespread recovery for the holiday season.

"People know that global growth is definitely improving, but the US consumer still remains stretched," Boockvar said.

November's record US Treasury debt refunding during the week is a reminder of the cost of economic recovery and the toll on consumers as the US dollar remains under pressure.

Recent auctions have been strong, but any sign that appetite for the debt is waning could ruffle markets.

Three Treasury auctions are scheduled this week to refinance US government debt in a record $81 billion (Dh297.5 billion) November refunding.

Demand factor

Last month signalled the end of the Federal Reserve's Treasury purchase programme, removing one element of demand.

"This is going to be an auction where the Fed can't participate. They've run out of their $300 billion limit. We'll have to see how demand steps up on its own," Ablin said.

After giving some hints to help financial markets gauge how long they will keep interest rates ultra-low, Fed officials will hit the lecture circuit during the week to offer their views on the economic outlook.

Bonds

Treasury yields plunge

Treasury two-year note yields touched the lowest since May after the US unemployment rate rose to a 26-year high of 10.2 per cent and the Federal Reserve said it will keep rates at record lows for an "extended period."

The difference between yields on two-year notes and ten-year securities reached 2.70 percentage points, the most since July, before the United States sells $81 billion (Dh297.5 billion) of three-year and ten-year notes and 30-year bonds this week.

"You really cannot conceptualise a scenario where the Fed can entertain tightening with over 10 per cent on the unemployment rate," said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion.

The two-year note yield fell five basis points on the week, or 0.05 percentage point, to 0.84 per cent, according to BGCantor Market Data. It touched 0.8321 per cent Friday, the lowest level since May 21. The 1 per cent security maturing in October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 9/32.

The 10-year note yield rose 11 basis points to 3.50 per cent. Payrolls fell by 190,000 last month, more than forecast by economists, a Labour Department report showed Friday in Washington. The jobless rate rose from 9.8 per cent in September.

"The unemployment rate is what everybody's going to focus on," said William O'Donnell, US government bond strategist at RBS Securities in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed.

"That's ultimately what's going to resonate in the press and the halls of Congress, where I'm sure there are lots of frowns."