After binging last week, markets slow down to digest retail sales, earnings

MANHATTAN (CN) — Following one of the best rallies in years, Wall Street this week moderated its bearish reaction to disappointing corporate earnings reports and ebullience over more data showing inflation is being tamed.

All three indices had their up and down moments this week, but the extremes of weeks’ past were moderated to minor gains and losses. By Friday’s closing bell the Dow Jones Industrial Average was a the same exact point as last Friday: at 33,747 points. The S&P 500 and Nasdaq both ended up slightly down for the week, losing 27 points and 177 points, respectively.

Investors were bombarded with a number of data points this week. On Tuesday, the Bureau of Labor Statistics released its producer price index, which showed demand increased by only 2% in October, half of the forecast from the expert consensus. The data underline the belief that inflation is moderating, and investors reacted accordingly, with markets on Tuesday closing up moderately.

Prices decreased across the board, according to the report, but tucked within the data were nuggets that were even better than the overall headline. The production costs for passenger cars declined by the largest amount since May 2017, the prices of nonfood goods fell by 0.1% last month, and trade service prices declined by half a percentage point.

“The PPI report is further evidence that businesses are losing pricing power in a cooling economy,” said Bill Adams, chief economist at Comerica Bank, noting that business-to-business selling prices also are rising more slowly.

Combined with last week’s consumer price index, the Federal Reserve Chair Jerome Powell has to feel somewhat relieved that inflation shows signs of abating. Powell has come under fire for the past two years for calling early inflation transitory and not doing more to stamp it out early.

Adams cautioned that, while the PPI report is good news, “the Fed is likely to strike a fairly hawkish tone” during its final decision in December and will once again raise interest rates. “Chair Powell feels burned after seeing inflation slow temporarily in 2021 only to flare up again in 2022, and he doesn’t want to make the same mistake twice,” he said. “The Fed will wait until they are quite confident that inflation is cooling before taking their foot off the brake.”

Retail sales data released this week also showed solid gains last month, with the U.S. Census Bureau reporting 1.3% increase in October. Some experts say the increase was helped greatly by a 4.1% monthly increase in gasoline station sales but also noted that, if you exclude the normally volatile automobiles and gas, retail sales gained a solid 0.9% in October.

In addition, September’s data was revised up from 0.4% to 0.6%, pointing to a still-strong economy, particularly since not all of the retail sales gains was due to inflation. Paul Ashworth, chief North America economist at Capital Economics, now forecasts real consumption growth will increase by 3% annualized in the fourth quarter, up from 1.4% during the third quarter.

“We still think the economy will slide into a mild recession in the first half of next year, but our conviction in that call is not as strong as our belief that inflation will come down sharply regardless of what happens to the real economy,” Ashworth wrote in an investor’s note. “Much more of this from the U.S. consumer, and we might be in for a soft landing after all.”

Despite the good retail news, some retailers are worried about economic headwinds. In its quarterly report, Target reported comparable sales came in lower than expected and net earnings were 52% down year-over-year, causing the company to have its worst day on the market since May. The company also noted that, due to “softening sales and profit trends,” it expected just a 3% operating margin rate in the fourth quarter.

Fellow retailer Kohl’s also dismayed investors, showing a 7.2% drop in net sales and withdrawing its full-year outlook. The company blamed “recent volatility in business trends” and “significant macroeconomic headwinds,” as well as its CEO transition, for the decision not to provide its full-year 2022 guidance.

It wasn’t all nail-biting in the retail space, however. In its earnings release Macy’s reported that its comparable sales were down 3.1% for the third quarter due to a drop in sales in the last few weeks. However, the company also raised its yearlong earnings forecast. “We are operating from a position of strong financial health — with appropriate levels of inventory, a strong balance sheet with ample liquidity, investment grade credit metrics, and fixed interest rate debt in a rising interest rate environment,” company CFO Adrian Mitchell said in a statement.

Overall, the retail data will likely not make much of a dent in the Federal Reserve’s likely strategy to begin reductions to its interest rate hikes next month, despite statements on Thursday by St. Louis Federal Reserve President James Bullard, who suggested the Fed would need to raise rates to 5% to 7% to combat inflation and that the central bank’s approach thus far has had only “limited effects on observed inflation.”

Tom Essaye of the Sevens Report discounted Bullard’s comments, writing in an investor’s note that the governor “enjoys shocking/surprising markets via his commentary, and he’s made quasi-outlandish hawkish commentary multiple times throughout the year.” He also noted Bullard is more hawkish than the consensus among Fed officials, and that it is unlikely the Fed follows his lead.

While the comments caught some on Wall Street by surprise, other Fed officials have recently said they worry about the harm from raising interest rates and are actually happy with slowing growth.

In comments on Wednesday, Fed Governor Christopher Waller noted the slow growth is a sign the Fed’s efforts are working. “At any other time, I would be pretty unhappy about slowing growth, but not now,” he said. “If you believe, as I do, that supply bottlenecks in the economy have mostly abated and that elevated inflation is primarily a function of high demand, then slowing down economic growth is absolutely necessary to bring inflation down to our 2% target.”

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