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Abysmal Retail Sales Have Wall Street Scratching Head

Retail Sales

So much for all the hype about sparkling holiday sales. The latest report for the sector indicates that December retail sales were so bad that Wall Street is now questioning the accuracy of the data while at the same time fretting that it might signal a looming recession.

The US Commerce Department says that December retail sales plunged 1.2 percent, considerably worse than even an earlier pessimistic outlook that called for 0.2 percent growth. This marked the biggest contraction since September 2009 when the  country was exiting one of the worst financial crises in history.

Consumer spending is a closely-watched metric because it powers more than two-thirds of the US economy. But it’s not just slumping sales that investors have to contend with. Signs of trouble are emerging in the employment market with jobless claims rising for the third week in a row.

(Click to enlarge)

Source: CNBC

As expected, the US and international markets reacted negatively. Both the S&P 500 and the Dow Jones finished lower even after paring back some of the heavy losses they suffered when the news first broke out.

Meanwhile, the 10-year Treasury yield fell 5 basis points to 2.65 percent while the Dollar Index slid 0.3 percent.

Government shutdown to blame?

The retail sales report shows that core retail sales, excluding automobiles, fell 1.7 percent month-on-month following a revised 1 percent jump in November with gasoline sales tumbling 5.1 percent and extending a trend of falling sales that began last fall. The Mail-order retail sector was the worst hit after plunging 3.9 percent, the sharpest monthly drop since November 2008 while department store sales declined 3.3 percent.

Adding to the dismal holiday sales are reports that jobless claims are on the up and up-- again. The tab for the week ending Feb.8 was 239,000, an increase of 4,000 and the third consecutive week of increases since the metric hit a 49-year low on Jan.19. Jobless claims tend to be more accurate than monthly employment reports since they represent the most current data in the labor market.

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In case you are feeling let down by the belated revelation, you can place the blame squarely on the just ended 35-day government shutdown, the longest on record. It’s probably also the reason why the January report is yet to come out. Although economists remain doubtful whether the situation is as bad as portrayed by those numbers, they are not reckless enough to dismiss the report outright. On the contrary, they are looking at plausible explanations.

Factor #1 could be the sharp and violent drop in the stock market in the month of December, a month that is normally associated with the Santa Claus effect and market gains.

Factor #2 could be the government shutdown which began in late December, though experts concede that it’s more likely to have impacted sentiment rather than actual retail sales.

As for worsening employment numbers, JPMorgan economists say that it’s hard to pin the blame on either the shutdown or the L.A. teachers strike and concede that it might simply be down to a job market that’s cooling down after a very strong period.

Stocks reverse

It’s amazing how quickly the economic outlook can change in the space of a month. The previous report revealed healthy retail spending and blockbuster employment numbers—both of which encouraged the Fed to forge ahead with its policy of monetary tightening. Another poor showing like that and the central bank might have to rethink its trajectory.

Still, there’s reason to feel optimistic. The stock markets have since recovered from one of their worst slumps in the post-war era to post some impressive gains in the year. The S&P 500 has racked up gains of 9.5 percent in the YTD; The Dow Jones has gained 9.1 percent while the tech-heavy Nasdaq Composite is flying high once again after tucking on 11.9 percent. International markets are doing well, too, with the MSCI World ETF (URTH) and the MSCI Emerging Markets Index (EEM) having climbed 8.9 percent and 7.9 percent, respectively, over the timeframe.

Hopefully, the retail sector and job market will follow suit.

(Click to enlarge)

Source: CNN Money

(Click to enlarge)

Source: CNN Money

The markets will probably continue on their warpath until the January report becomes available. Until then, one thing remains clear: the markets are basically walking on eggs shells.

By Alex Kimani for Safehaven.com 

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