Stocks were largely unchanged on Wednesday as traders in other markets — bonds, currencies, and commodities — busily reacted to a surprisingly weak April retail sales report. Sales less automobiles rose just 0.1% over March versus the 0.5% growth that was expected and the 0.7% rise for the prior month.
Auto sales were soft too, but the real surprise was the steep 2.2% drop in department store sales and the 0.4% drop in electronics and appliances, the seventh straight decline.
The weakness was a surprise as hopes were high that tightening in the job market (with the unemployment rate down to 5.4%) and the decline in energy costs (wholesale gas prices are up 70% from January’s lows but are still down 34% from last summer’s highs) would bolster consumer spending and help the economy recovery from a tepid performance in the first quarter.
But this just didn’t happen.
In the end, the Nasdaq Composite gained 0.1%, the Dow Jones Industrial Average and the S&P 500 lost a fraction, while the Russell 2000 lost 0.1%.
Tech stocks led the way with a 0.5% gain, helped by a 1.3% gain in Facebook Inc (NASDAQ:FB), while utilities were the laggards and fell 1.1%.
While stocks largely shrugged, other markets priced in a rising expectation the Federal Reserve will be forced to delay its rate hike timing to September or later — unable to move to tighten policy in the midst of ongoing economic softness and consumer apprehension.
The U.S. dollar lost 1.1% against the euro and 0.7% against the Japanese yen. Precious metals were on the move in a big way with gold rising 1.9%. That boosted the ProShares Ultra Silver (ETF) (NYSEARCA:AGQ) recommended to Edge subscribers to a gain of 6.9% — for an 11.6% profit so far this month — with room for much more upside. Related mining stocks like Pan American Silver Corp (USA) (NASDAQ:PAAS) were on the move as well.
Crude oil lost 1.1% as Saudi Arabia looks ready to declare victory in its fight against U.S. shale oil producers and ramp up its own production.
Treasury bonds were mixed with the 30-year yield finishing at 3.08% after testing down to 2.96% after the retail sales report.
The spending disappointment likely reflects a sense of apprehension on the part of consumers and perhaps ongoing financial vulnerability.
Oksana Poltavets at Deutsche Bank believes that revisions to the March spending data means that real Q1 GDP growth is likely to be “significantly weaker” than the initial 0.2% estimate. Her forecast of the government’s second estimate is running at -1.0%.
IHS Global Insight economist Chris Christopher is looking for retailers to keep a close eye on Q3 sales as the back-to-school shopping season will set the tone for the all-important holiday shopping season. Stock market investors aren’t waiting to express a vote of no confidence, pushing the SPDR S&P Retail (ETF) (NYSEARCA:XRT) further below its 50-day moving average and down about 4% from its mid-April high.
What went wrong?
Paul Ashworth at Capital Economics worries the data challenges the assumption shared by many that weakness in the first quarter was largely weather related. Deeper issues besides snow are at work. Data from the New York Fed shows that credit card debt declined nearly 3% in the first quarter, compared to the fourth quarter of 2014, a sign some gas savings were used to deleverage.
The savings rate is up as well, not just here at home but in other developed economies as well.
Until this all turns around — on the back of a meaningful rise of wage inflation — it’s hard to see the Fed moving to tighten policy anytime soon.
In response, I’m looking for precious metals to continue their rebound higher and have recommended a number of new trades — such as call options on Silver Wheaton Corp. (USA) (NYSE:SLW) to Edge Pro subscribers — to clients today. For more ideas, be sure to review my recent post on mining stocks here.