Global growth concerns have fueled Wall Street’s wild swings the last two weeks, but unexpectedly weak U.S. economic data roiled equity markets Wednesday as investors worry the global slowdown could extend to the U.S.
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The Dow Jones Industrial Average plummeted 369 points at the opening bell before stabilizing briefly around a negative 200-point level, and bobbing around the rest of the day in volatile action. The rush to sell in the first few minutes of trade was fueled by a slew of disappointing readings on the U.S. economy, but the negative sentiment didn’t wane as markets continued their decline through afternoon trade. At its lowest level, the Dow sank more than 460 points around 1:30 p.m. EST, its steepest intraday drop in more than three years.
The All Important American Consumer
Michael Block, chief strategist at Rhino Trading Partners, said retail sales was the most concerning segment of the three-part picture.
“The most serious part of it was the weakness in advance retail sales. There is hope that lower gas prices would have boosted this data, but that did not play out, and that thesis is being questioned now,” he said.
September retail sales, which serve as a key gauge of the U.S. consumer, notched their first decline since January, posting a 0.3% drop. That was slightly lower than the 0.1% fall Wall Street anticipated. But the picture took on a much gloomier perspective when stripping out the volatile auto segment. In that case, sales saw a 0.2% decline versus a 0.3% pick-up economists were expecting.
In a note to clients, IHS Global Insight’s U.S. Economist Chris Christopher advised not to read too deeply into the retail sales figures, and pointed to electronics sales which surged 3.4% for the month, likely thanks to the nation’s biggest tech companies.
“In September, consumers splurged on the latest Apple (NASDAQ:AAPL) iPhone and pulled back on other types of discretionary spending,” Christopher said. “Electronic store sales splurged…the strongest monthly growth rate since October 2011, another strong Apple iPhone month).”
Following the report, Barclays lowered its tracking estimate for third-quarter private consumption growth to 1.5% from 2%, but hiked its third-quarter GDP forecast to 3% from 2.5%.
“The main reason for the upward revision is that trade and business investment spending look set to make a more positive contribution in Q3 14 than we had projected, more than offsetting softer contributions from consumer spending and inventories,” the investment bank said in a note to clients.
Further, all hope for the American consumer is not lost. IHS is calling for a “glittering” holiday sales season when contrasted with the last two years which each saw growth of 1.3%. This year, the firm is calling for a 4.2% improvement.
“This is partly the result of last year’s extraordinary winter weather providing a low bar and a depressed base, especially considering that the government shutdown in October of last year caused consumer mood to take a hit,” Christopher noted. “In addition, the employment picture is looking brighter, and while that has yet to translate into significant wage increases, consumers are feeling relatively better about their current financial situation.”
Producer Prices Picture
Ahead of the opening bell, Wall Street also got a snapshot of inflation at the wholesale level, which saw its first slowdown since August 2013. Prices fell 0.1% in September, opposite the 0.1% increase economists forecast. After excluding the food and energy components, prices were unchanged versus a 0.1% expected tick higher.
Food prices helped push prices lower for the month, providing some kind of relief from surges of the last few months. Energy prices also eased 0.7% as gas prices saw a 2.6% drop – that’s been echoed in the recent attention surrounding the massive declines in oil prices, which hover near two-year lows.
Michael Montogomery, IHS Global Insight U.S. economist, said in a note the good news for consumers is food prices will continue to fall rather than begin to tick back up. But that’s not all: Relief at the pump will also help consumers’ bottom lines.
“With oil prices falling to provide help at the gas pump, the net may be far happier consumers during the holidays than would have been expected only a few months ago,” he wrote. “The two most observed prices by consumers are food and energy and they play the largest role in forming consumer opinions about inflation, providing a little more room for luxuries rather than facing a squeeze from necessities.”
Block weighed in on the data, turning focus back to the data’s impact on the Federal Reserve and its economic forecasts. He said weak PPI isn’t a surprise, but does underscore why many are scaling back forecasts for when the Federal Reserve will begin to hike interest rates. At this point, the market has essentially priced in expectations for a rate hike sometime around the middle of next year.
Empire State Manufacturing
Finally, a reading on the manufacturing sector in the New York region came in significantly under expectations. Though factory activity didn’t fall into contraction territory, the gauge plummeted to 6.17 in October from a reading of 27.54 the month prior, widely missing expectations for a much shallower-than-expected fall to 20.50.
Analysts agree this piece of economic data wasn’t a significant motivator for the huge downside swing on the Street, though it likely contributed to the negative sentiment, and could make a run to put a dent in the dollar’s surging value.
“Every dog has its day and that is today for the Euro against the dollar. The single currency has made fast work of gaining ground versus the greenback after the disasterous manufacturing figures form the U.S. Any suggestion that the Fed is looking to raise interest rates has been dashed,” David Madden, market analyst at IG wrote in a note to clients.
Meanwhile, Block calls the New York-focused data a “mild negative” but “not a huge needle mover.”
Peter Bookvar, managing director and chief market analyst at The Lindsey Group, noted the overall New York-region picture was gloomy as new orders turned negative for the first time since April.
“Bottom line, I’m not going to draw any conclusions about the national picture on manufacturing from this one figure, but activity definitely moderated in the New York region,” he said.
Still, Block notes while data is a significant player in today’s steep selloff, it’s not the only driver. He said for the markets, it’s all about pain management and price movements that result from more selloff pain. He pointed specifically to October fund performance which shows the extent of the damage done inside the markets. He said he fears this is the tip of the iceberg.
“All of these markets interact and when one moves, the others are affected,” Block said. “When risk comes off, Treasuries rally and that very movement worries people more – they assume something is wrong. The rate compression wreaks havoc on mortgage services, so they get hurt, and it also affects anyone else hedged with Treasuries.”