Around the Street

Experts Discuss Retail, Dollar, ECB Moves


By BW Staff

With the 800-pound gorilla silent, what did the other denizens of the U.S. retail jungle have to say about May sales? The International Council of Shopping Centers' U.S. chain store sales index for May, released June 4, sank 6.4% from a year earlier, but the news was clouded by the group's admission that this is the first month of the report that does not include Wal-Mart (WMT) sales (the company has ceased releasing that data on a monthly basis).

Without Wal-Mart's results, the big retailing picture seems less clear, even as investors are looking for hints that consumer spending has picked up amid early hopes for economic recovery.

The retailers who did release May sales figures generally disappointed the Street, with big names like Target (TGT), Abercrombie & Fitch (ANF), Costco (COST), Hot Topic (HOTT), Family Dollar Stores (FDO), Dillards (DDS), Nordstrom (JWN), Macy's (M), BJ's Wholesale (BJ), Children's Place (PLCE), and Limited Brands (LTD) falling on June 4.

BusinessWeek compiled comments from Wall Street economists and strategists about the retail sector, interest rates, the dollar, and other important topics on June 4:

Emily Shanks, Barclays Capital (BCS)
May comparable-store sales mainly missed consensus [forecasts], but there were some notable outperformers, and inventories remain clean. This is the first month without Wal-Mart disclosing monthly comps, which, given Wal-Mart's size, limits trend transparency somewhat. There was a mixed performance within the different channels. Notably, reversing a long-held trend, department stores were generally in line with to modestly better than expectations. Category-wise, dresses and cosmetics were repeat outperformers; and accessories, intimates, and petite were strong as well. Home and furniture, in addition to fine jewelry, continued to underperform.

Geographically, the Southeast was a consistent underperformer, while the Southwest and Mid-Atlantic regions were notably strong. Reported inventories were well controlled, on plan, and down year-over-year; and in some instances clearance inventory was noted to be down year-over-year, all supporting margin performance.

Colin Ellis, Daiwa Securities (8601.T)
The [European Central Bank] today decided to leave interest rates unchanged, with the refi rate staying at a record low of 1.0%. At the accompanying press conference, [ECB President Jean-Claude] Trichet confirmed that the ECB will press ahead with its plan to buy €60 billion of euro-denominated covered bonds. The decision to leave interest rates unchanged had been widely expected, with Trichet signaling that current levels were appropriate at the moment … [W]hile he did not rule out further cuts in rates, 1% still looks like the floor in the refi rate for now.

Most of the discussion at the press conference focused on the asset purchase plan. Trichet set out some further details here—the ECB will engage in primary and secondary markets, and accept bonds that are eligible collateral in its main operations. Any bonds purchased must be rated AA or higher by at least one of the major rating agencies—not a high hurdle given the perceived low risk of the bonds, as many are AAA—and the ECB will aim to conclude these operations by June 2010. Today's announcement seemed designed to give the ECB maximum flexibility in implementing its purchases.

Trichet also refused to discuss possible extensions to the purchase plan, leaving the door open to further action if it were required. Our impression was that the Governing Council may not have fully made its mind up yet—which, given its recent divisions, may not be that surprising.

Currency analysts, Brown Brothers Harriman
The dollar's path of least resistance remains to the downside. Some modest signs of momentum fatigue will emerge again, but that will merely provide better U.S. dollar selling opportunities. The Fed is expected to approve some banks for repayment of TARP money, contributing to some easing of tensions in the bond market, if anything a marginally supportive force for the dollar. U.S. data may provide a test of currency strength against the buck with upside risks to U.S. retail sales and falling inventories; a positive for the U.S. growth outlook (especially vs. the euro zone and Japan). Trade numbers out of G-7 and China are likely to be mixed (U.S. deficit widening a fraction, Chinese export growth moderating), but the general trend is to confirm gradual improvement in global trade.

Foreign exchange markets are unlikely to be a key topic at the G-8 finance ministers' meeting June 12-13 in Italy, with the focus on financial and economic stability and policy coordination, the environment, and African development.

Diane Vazza, Standards & Poor's Ratings Services
Speculative-grade-rated companies can't really be blamed for casting envious glances at their investment-grade-rated counterparts, which are finding it comparatively easy to meet financing needs. The flight to quality has clearly turned the tide of investor appetite in the favor of investment-grade companies. And the issuers that have lower ratings and greater funding needs are left with more convincing to do to investors and lenders.

Nevertheless, a closer investigation of investment-grade debt management suggests that even blue chip companies have had to make adjustments to overcome the limited availability of funding that has resulted from the financial volatility. And as financing conditions have changed, these issuers have had to adapt their funding strategies. The changes are especially noteworthy for funding at short-term maturities, which is critical for managing ongoing capital needs.


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