Markets rise as rates look less likely to

Further evidence on Wednesday that the US consumer is struggling and traditional retailers are having trouble maintaining margins. Wal-Mart its third quarter earnings announcement reported weaker than expected earnings and pointed to a poor outlook for the coming year, the stock fell 10% on the news. The management go on to blame competition from ecommerce companies such as Amazon impacting profitability. This fall was on top of an already weak share price that has now lost almost one third of its value this year. Likewise luxury goods companies do not appear immune to weakness in consumer spending as Burberry failed to meet analyst expectations with their third quarter earnings. Burberry blamed a weakness in China sales for its disappointing results.

The latest retail sales report for September reinforced why companies such as Wal-Mart are finding life tough. Retail sales in the US were flat month on month and only a 2.5% gain year on year. Traditional retailers, such as Wal-Mart, face structural as well as economic challenges. On a slightly brighter earnings note, particularly after JP Morgan’s miss earlier in the week, Bank of America, Wells Fargo and Citi did at least meet expectations.

The latest edition of the Federal Reserve’s so called “beige book”, a report on the current state of the economy was also released on Wednesday evening. One interesting fact that despite tighter labour markets and some difficulty in finding skilled and unskilled workers, wage growth remained subdued. Historically tighter labour conditions should lead to wage inflation. A similar picture was painted in the UK, as unemployment levels fell more than expected, however wages rose less than expected.

Another sign that the economy in the US still lacks an inflationary push, the latest Producer Price Index reported a fall of 0.5% in the month of August. Year on year prices fell by 1.1%, the eighth straight month of falls.  Thursday’s release of September’s US inflation came in line with expectations, US inflation year on year remained at zero, the core inflation rate that excludes petrol prices remained steady at 1.9% year on year. Equity prices rallied on Thursday probably in recognition that this data would lead one to believe that the pressure will not be on the Federal Reserve to raise interest rates before the year-end. 

Posted on October 16, 2015 .