After a month of rising investor pessimism and heightened concerns of a double-dip recession, investor confidence has received an earnings-induced jolt. After Alcoa (AA) delivered a better-than-expected growth outlook, Intel (INTC) blew away any and all expectations, engineering its best quarter on record.U.S. equity futures are indicating a modestly higher open as the Intel-induced uptrend has softened ahead of key economic data.
First out of the gate was June retail sales, which was generally as expected, declining 0.5%. The ex-auto figure came in a little worse, down 0.1% versus the Briefing.com consensus estimate of flat growth.
The takeaway from the June Retail Sales report is that it was neither good nor particularly bad. It was, however, better than feared, which is a perception that is selling well in the current market environment. In general, areas that saw declines in May saw increases in June and vice versa. From a sales perspective, it was a bit of a mixed bag then. The bright note is that core retail sales, which exclude building materials, autos and gasoline sales, rose 0.2%. That is a favorable input for Q2 GDP.
Overall, total retail sales declined -0.5% (consensus -0.2%) while sales, excluding autos, dipped 0.1% (consensus unchanged). Revisions for May were rather innocuous. Total retail sales were revised to show a decline of 1.1% from an originally reported decline of 1.2%. Excluding autos, sales were revised to show a 1.2% decline versus an originally reported 1.1% decline.
At 10:00 a.m. ET comes the May business inventories report. The Briefing.com consensus is 0.2% versus 0.4% in the prior month. Also out today will be FOMC minutes from the June 22-23 meeting, which will hit the wires at 2:00 p.m. ET.
Already out premarket was the weekly mortgage applications data, and there is no way to paint them with a positive brush. The MBA Purchase Applications Index fell 3.1% from the prior week, representing the eighth decline in last nine weeks since the homebuyer tax credits expired at end of April. The purchase applications index is now down 43.4% y/y.
In what is becoming tradition, Intel did more than reassure investors that growth is recovering. For the sixth consecutive quarter, the chip giant beat on the bottom line, delivering a stellar quarter on all marks as a corporate refresh cycle contributed to a richer product mix and higher average selling prices. The swing factor in the quarter was gross margin, which not only exceeding guidance by 300 bps, but Intel raised the annual bar by another 200 bps to 66%. This equates to 500 bps margin expansion over the first half of 2010.
What was notable was the strength across all regions and product mix, suggesting the corporate refresh cycle has indeed strengthened. This also raises the bar for consumer demand in the second half of the year after management upped the ante for the remaining quarters. It guided third quarter sales to $11.2-$12.0 bln versus the consensus of $10.92 bln and expects seasonal strength to continue in the fourth quarter, with demand remaining robust by geography, product, and customer.
Intel's performance sparked a global tech rally with Asian chip and chip-related stocks gaining anywhere between 3-6%. The tech-heavy markets, Japan, Korea, and Taiwan, advanced between 1-2%. The Chinese markets continue to struggle due to the real estate sector.
Looking at other markets, the euro and yen are hovering at 1.2700 and 88.50, respectively, against the dollar. The forward curve in crude is now comfortably at the high $70 per barrel level.
Also of note was the 10-year auction yesterday, which was met with modest demand given the flight-to-safety trade that has been so prevalent recently. On one hand, the "dollar demand" of $64.9 bln (the auction size multiplied by the bid-to-cover) was the lowest it has been since February, which indicates the low yield (3.12%) kept some participants on the sidelines. Some may argue the demand indicates the potential for a return to the risk trade as investors put money to work elsewhere. We'd argue the view would be premature. $65 bln is still a considerable sum of money looking to be invested at 3.12% for 10 years. The ultimate winner is the U.S. government, who continues to take advantage of borrowing at extremely low rates even as raises supply.
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