October retail data gives earnings a boost; confuse Fed view

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October's headline retail sales checked in at 0.4 percent, above expectations, and supported the view of those who would like to see the Federal Reserve begin tapering bond purchases sooner rather than later.

Ed Hyman at ISI group says there's a 60 percent chance the economy will accelerate in the coming weeks, citing the end of the government shutdown, as well as falling bond yields and gasoline prices. Foreign economies are also improving, and the next Fed Chair succeeds Ben Bernanke as the central bank's most vocal dove on monetary policy.

But there are warning signs: ISI also notes that their homebuilder survey declined to 52.0, the lowest level in a year--it was as high as 69.2 in May. The ISI Truckers Survey also neared its lowest level of the year.


1) Fed in full court press mode: tapering is not tightening. Bernanke, in a speech last night, reiterated that if the economic news continued to improve, the Fed would "would likely begin to moderate the pace of purchases." However, he clearly indicated that the Fed could continue to keep rates low even after the unemployment threshold is met.

In other words: the Fed is again stating that tapering is not tightening. JP Morgan noted that " the Chairman would still like to slow down asset purchases, but that a necessary condition for the first taper is a sense that the market has distinguished tapering from tightening."

Yellen's letter to a Senator yesterday, where she said "monetary policy is likely to remain highly accommodative" even after the unemployment rate drops below the 6.5 percent threshold was also an indication that she too is trying to separate tapering from raising rates.

The October FOMC minutes are out this afternoon.

2) On a related note to retail sales, retail earnings were fairly encouraging:

a) Lowe's was a penny light, but same store sales of 6.2 percent were above expectations and the company raised its full year earnings per share (EPS) guidance to $2.15 from $2.10. Since estimates are around $2.19, however, the higher guidance is still below consensus.

Some disappointment that margins were not better, given the strong comp store sales gains. Expenses were higher than expected: they invested more in the business. A 6.2 percent sales gain is very good, but it is still below Home Depot's 7.4 percent gain. Lowe's comps have consistently underperformed HD's for several years, which has more professional business.

The bigger problem for both companies that interest rates are on the rise, and the housing boom is likely cooling off.

b) JC Penney: The key takeaway is the company will survive. The battered retail giant reported a slightly larger loss than expected ($1.81 vs. $1.77 expected), but their fourth quarter outlook indicated same store sales and gross margin would improve, both sequentially and year-over-year. They also noted improvement in October and early November.

This is good enough: markets have been looking for some indication that they will even be able to stay in business. Both men's and women's apparel have been improving, and that has been an especially weak segment for them.

By CNBC's Bob Pisani