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Negative inflation, retail data dampen Wall Street positivity

Investors were prepared for more high inflation data, but poor retail sales took markets by surprise.

MANHATTAN (CN) — Wall Street flirted for days with slight gains and moderate losses only to end on a sour note with the Dow Jones Industrial Average shedding 320 points for the week. The S&P 500 and Nasdaq declined as well but not as much, only 13 points and 39 points, respectively.  

On Friday, the U.S. Census Bureau reported that retail sales last month fell by 1.9%, hitting only $626 billion, as the omicron surge muffled holiday shopping for many Americans. Despite the monthly drop in sales, retail is still up tremendously compared with the same period last year, with gasoline stations and food and drinking establishments both up 41% year-over-year.

“December was a rough month for the American consumer,” said Anu Gaggar, global investment strategist at Commonwealth Financial Network. “Between higher prices, empty shelves, consumers sick from omicron, and holiday shopping pulled forward, retail activity declined even more than expected, and November numbers were also revised lower.”

Surprisingly, online sales also fell in December, according to the Census Bureau, which reported a staggering 8.7% decline in non-store retailers. Gaggar noted that “the issue is likely not that consumers do not want to spend, it is more that they are unable to spend.”  

The poor retail numbers added to yet another decades-high inflation report from earlier in the week, though markets seemed benumbed by that bit of negative news. According to the Labor Department’s Wednesday report, inflation is higher than it’s been in decades, as the consumer price index increased half a percentage point last month to hit 7%, the highest it has been since 1982.

“This is every bit as bad as we expected,” said Paul Ashworth, chief North America economist at Capital Economics. He added that, while “the headline rate has probably peaked now, core CPI inflation increased to 5.5% last month and will continue to climb toward 6% over the coming months.”

The largest price increases were for apparel and used vehicles, which gained by 1.7% and 3.5%, respectively. Food costs also rose, though by less than in recent months, the agency found, while energy prices fell by 0.4% and by 2.4% for fuel oil specifically.

While the data was surprising for many, for investors it was to be expected. “We’re still seeing the effects of supply chain issues resulting in higher prices for a variety of goods and it remains to be seen if these pricing pressures will start to moderate as we move through 2022,” said Brian Price, head of investment management at the Commonwealth Financial Network.

“The market will continue to be laser-focused on upcoming changes in the Federal Reserve’s interest rate policy in the coming months,” he said. “It now fees like consensus has pulled those projections forward and we could be looking at a rate hike as soon as March.”

The rise of inflation has the larger business community concerned, too. In its December small business optimism index, the National Federation of Independent Business found that 22% of respondents reported inflation as the single most important problem that their business faces. This is the highest that inflation has ranked as problem number one on the survey since late 1981.

Inflation as a problem ranked second only to quality of labor, according to the survey. One year ago, inflation was one of the least-concerning problems among respondents. “Inflation is at the highest level since the 1980s and is having an overwhelming impact on owners’ ability to manage their business,” NFIB Chief Economist Bill Dunkelberg said in a statement.

Speaking with reporters earlier in the week, the lead lobbyist for the U.S. Chamber of Commerce, Neil Bradley, said that inflation is inextricably intertwined with economic growth, though he warned that Congress could jeopardize both with burdensome legislation. “The U.S. economy is in a really great position for growth in 2022,” he told reporters, saying market gains gave been driven by the “surprising strength” of the private sector coming out of the pandemic. 

The impact of the omicron variant has started to take its toll on unemployment claims, as well. For the week ending January 8, the Labor Department recorded 230,000 initial claims. It is the third straight week that claims have risen and the highest number of initial claims since mid-November.

“The increase in unemployment claims shouldn’t come as a surprise,” Morning Consult chief economist John Leer said. “What’s surprising is that claims didn’t rise more.”

Leer noted that many workers are ineligible for benefits but that the good news is that many businesses are now doing a better job or retaining workers even as Covid case numbers increase.

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