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Thursday Look Ahead: Retail Sales May Be the Silver Lining in Gloomy Economy

When the going gets tough, the tough go shopping, and the markets Thursday will be watching July chain store sales to see just how much consumers bought.

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After a series of worrying economic reports, the nation's chain stores may actually tell one of the better stories about activity in the month of July even as consumer spending likely remained pretty weak. Thomson Reuters forecasts a gain of 4.3 percent for same stores sales.

Europe remains a major focus, and a big worry. An important event Thursday will be European Central Bank President Jean-Clause Trichet's press briefing, after the ECB rate meeting before the New York open. The markets will also be watching the weekly jobless claims report, at 8:30 a.m. ET, and another flurry of corporate earnings releases, including General Motors. AIG, Kraft and LinkedIn report after the closing bell.

Stocks on Wednesday waffled early on growth fears and European debt concerns, before reversing course and riding higher with tech shares into the closing bell. The Dow rose 29 points to 11,896, recovering from a 166-point decline and breaking an eight-day losing streak. The S&P was up 4 at 1260, after dipping below the critical 1248 support level. The Nasdaq gained 23 to 2693.

Gold continued its record rise, closing at $1,666 per ounce, after hitting a high of $1,675 per ounce. Oil slumped, losing 2 percent to $91.93 on concerns of declining demand after a larger than expected increase in oil and gasoline supplies was reported by the Department of Energy.

Treasurys were flattish, with the 10-year yield at 2.611 percent, after slipping to 2.542 percent earlier in the day. ISM non manufacturing data came in at 52.7, off slightly from the 53.5 expected, reflecting the slowest level of services sector activity since February, 2010. ADP's private sector jobs report showed an increase of 114,000 in July, a number that may or may not be a clue to Friday's non farm payrolls report.

Dollar Daze

The dollar Wednesday slipped 0.9 percent against the euro and was lower against sterling and yen. It gained slightly on the Swiss franc, after the Swiss National Bank cut interest rates as a way to battle the swarm of buyers into its currency.

Deutsche Bank chief G-10 currency strategist Alan Ruskin said the ECB is not expected to raise rates at its Thursday meeting, or even signal another rate increase is in the offing. The Bank of England, which also meets, is also not expected to take any action.

Trichet is likely to tread gingerly when asked about the market assault on Spanish and Italian bonds this week, which drove rates to record wide spreads against the euro. "In some ways, the less said, the better. I think, if asked, they could point to the idea that Italy's and Spain's circumstances are fundamentally different than Portugal, Ireland and Greece," Ruskin said.

Market speculation has focused on the possibility that the ECB could resume buying government debt, but the ECB has been opposed to it. Ruskin believes the ECB would try other things first, like providing more liquidity and verbal intervention. "If that doesn't work, maybe they'll have to buy Italian bonds, but they don't want to go there," he said.

Ruskin said the foreign exchange market is of course focused on Europe, but it has been moving along with the S&P 500. "It seems like the next big move is almost certainly going to be the employment report at the end of the week. So, 1250 (on the S&P), closing below there would have been big," he said. 1250 is in the center of the key support range that the market broke and then rose back above Wednesday.

"So I think it's just gong to be cautious consolidation into the employment report from a risk perspective," he said.

What to Watch

Retailers' monthly sales are issued in the morning, with a big flurry ahead of the opening bell. Thomson Reuters expects the discount stores to be the best performers, up 6.1 percent, followed by teen apparel, up 5 percent and department stores, up 3.8 percent. The weakest performers will likely be apparel, up 2.2 percent, and drug stores, up 2.5 percent.

These sales are being watched as a clue to how the consumer was behaving during July, a period when sentiment fell and Washington's haggling over the debt ceiling added to uncertainty. June consumer spending was just reported this week to be down 0.2 percent, its biggest drop since September, 2009.

"Gas prices were down so you should get a little bit better retail numbers, and I think after essentially having consumer spending down three months in a row, at some point you should have a little bit of a move higher," said J.P. Morgan economist Michael Feroli.

Feroli, who has been expecting to see slow third quarter growth, pushed his forecast even lower Wednesday to 1.5 percent from 2.5 percent. Several economists, who were looking for above 3 percent growth, trimmed their forecasts this week, following weak manufacturing data Monday and weaker-than-expected first half GDP, reported last Friday.

This week has proven to be a steady and nervous walk up to the Friday July jobs report, expected to show 85,000 non farm payrolls were added and an unemployment rate of 9.2 percent. The weekly claims number, while unrelated to this jobs report, is also important, especially since claims fell to 398,000 last week, the first reading below 400,000 in three months.

"It may be a modest retracement of the improvement we saw last week," said Feroli. "We're looking for 410,000."

Earnings Central

Besides GM, companies reporting before the opening bell include Unilever, DirectTV, Cardinal Health, CVS Caremark, El Paso, CBOE Holdings, Anglogold Ashanti, Apache, Southwest Air, Plains Exploration, NRG Energy, PG&E, Teradata, Huntsman and Fortune Brands.

AIG, Kraft Foods, LinkedIn, First Solar, and Priceline.com report after the bell.

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