Caution has rippled across Wall Street today, sending share prices tumbling in New York, with disappointing earnings from retail bellwether Wal-Mart sending alarm bells ringing about consumer behaviour, while a decline in industrial production last month has hurt expectations for GDP growth in the second quarter.
By Peter Martin
Thursday, May 15, 2014
Retailing giant Wal-Mart reported first-quarter earnings of $1.11 per share, short of analyst expectations and down from $1.14 per share achieved a year before. Revenue grew 0.8%, also missing forecasts. Though the company blamed its poor first-quarter performance on bad weather, it also disappointed with its guidance, saying it expects earnings for its second quarter to fall within the range of $1.15 to $1.25. Analysts had been calling for $1.28 per share. Shares in the Dow component were down 2.4% by early afternoon in New York.
The Fed’s industrial production index shrank 0.6% in April, missing the consensus estimate that had pointed to an unchanged result, and a stark slowdown after the 0.9% rise seen in March. Historically industrial production has shown a close correlation with economic activity, and such a sharp decline can be considered a signal of weakness for both aggregate demand and GDP. The manufacturing component of the index sank 0.4%, while capacity utilization (a ratio of current industrial production compared to the sector running at full capacity) fell from 79.3% to 78.6%. While 78.6% is above levels that historically have been seen in downturns in the economy, a slide in the ratio does point to softer economic conditions nonetheless.
The downbeat industrial production data took the shine off earlier signs of improvement in the number of jobless claims. The number of Americans filing for unemployment insurance for the first time fell 24,000 last week to a seasonally adjusted 297,000. This is the lowest reading for this time of year in seven years, and will provide a nice boost to May’s labor report. The four-week moving average improves slightly to 323,250 from 325,250, but compare unfavourably to where it was a month ago. Inflation data on Thursday morning came in broadly in line with expectations, with a 0.3% rise in the Consumer Price Index for April. Year-on-year the change was 2.0%, the highest level seen in over a year, and this evidence of warmth on the inflation front tends to add credence to the Fed’s decision to be well on its way towards exiting stimulus.
By early afternoon in New York, stock index benchmarks were deep in the red, with the Dow Jones Industrial Average, the S&P 500 index and the NASDAQ 100 all suffering falls of more than 1%. As we have seen several times in recent weeks, the declines have been led by so-called ‘momentum’ stocks. The risk-off sentiment of the day has benefitted the safe-haven Japanese yen, with USD/JPY falling 0.33% to 101.54. The yen was also supported by first-quarter GDP growth in Japan that exceeded expectations: Japanese GDP grew an eye-popping 1.5% in Q1, for a yearly change of 2.7%, driven to a large degree by business spending, though private consumption also improved. The increase in spending preceded an April 1 sales tax in Japan, though, and evidence of a slowdown has already been seen in retail sales data since the tax hike.
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