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Stocks On Track

Stocks are on track for another strong open, with positive data out of China and the better-than-expected J.P. Morgan (JPM) report offsetting the soft Retail Sales report. Market participants likely see a silver lining in the weak retail sales reading as well, given their Fed preoccupation.
The March Retail Sales report came out weaker than expected, with both the report’s ‘headline’ growth as well as its internals missing estimates. This is disappointing as it runs counter to the emerging narrative that the U.S. economy had turned around in March after a soft showing in the first two months of the quarter. Positive momentum in the March ISM surveys, from both the factory as well as service sectors — as well as continued gains in labor market readings — had raised these hopes.
But we didn’t get that in this report. What this means is that estimates of Q1 GDP, which were barely in positive territory to begin with, will get revised down some more. The Atlanta Fed’s real-time GDP tracker, known as GDPNow, was tracking at +0.1% ahead of this morning’s Retail Sales report. It is possible that this report will push us in negative territory for the quarter.
J.P. Morgan easily beat estimates that had come down precipitously over the last three months on the back of persistent weakness in interest rates as a result of the evolving Fed outlook, macroeconomic uncertainty weighing on the investment banking and trading revenues and rising concerns about the bank’s Energy sector exposure. In the end, trading revenues came in better than expected though they were -11% below the year-earlier level as volumes markedly improved in March following a weak start in January and February. The March bounce has reportedly continued into April, though it is likely too early to comment on the staying power of the trend for the current quarter.
This favorable trading momentum is most pertinent to Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS), which report the rest of this week. On the expense front, management was able to squeeze more out of the cost base even though provisions for credit losses roughly doubled due to the Energy sector’s weak credit profile.
To put JPM’s better-than-expected report this morning in its proper context, the reported $1.35 per share in EPS compares to the Zacks Consensus of $1.26 per share, but the consensus EPS number had come down from $1.52 two months ago. The JPM report will likely cause the ‘whisper’ estimates for its peers to go up ahead of their earnings releases.
All in all, this is market-friendly — the bank earnings report raises hopes that the earnings picture may not be that bad, and the favorable China reading eases some of the persistent worries about that region. The Retail Sales report is unwelcome, but even that may be pointing towards a less threatening Fed in the days to come.  

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