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The three US stock index benchmarks are all down well over 1% today, as the combination of some earnings disappointments and a flurry of economic indicators that seem to pave the way to the Fed tapering its stimulus in the near future sparked selling on Wall Street.
The market has been wracked by worries about whether the Fed will announce a reduction in the amount of securities it purchases each month at September's FOMC meeting and this issue has been exacerbated by a report today showing strong improvement in the labour market.
The number of claimants for first-time unemployment benefit fell by 15,000 last week to 320,000, setting a new post-recovery low, and bringing the four-week average down to 332,000, also a fresh recovery low. Based on the numbers we’ve seen for jobless claims so far in August, it’s a fairly safe bet that the employment report for this month is going to look quite strong. Fed Chairman Ben Bernanke, along with many other Fed officials, has frequently emphasised that the decision to taper is data dependent and so the strength of this latest data set has re-enforced market expectation for scaling back to commence in September.
It may not be quite as clear-cut as all that, however, as a number of reports today point toward a slowdown in manufacturing activity. Both the Empire State and Philly Fed manufacturing surveys showed lower levels of business activity for this month, while a separate report from the Fed showed industrial production unchanged in July, with a surprise 0.1% drop in manufacturing.
James Bullard, a voting member of the FOMC and the President of the St Louis Fed, said in a speech today that he thinks the Fed should wait for more evidence of strength in the economy before starting to taper. ‘The committee still needs to see more data on macroeconomic performance from the second half of 2013 before making a judgement in this matter,’ he said. How much this reflects the broader view of the other committee members remains to be seen, however.
Dow component Wal-Mart reported second-quarter earnings of $1.25 per share, which were in line with estimates, but the results came up short on the revenue-front. The retailing giant also disappointed the market by lowering full-year forecasts for both earnings and sales. Shares in Wal-Mart fell 2.6%.
Wal-Mart is the world’s largest retailer, and this raises questions about the strength of consumer spending as a whole. Consumer spending is responsible for such a large portion of GDP that Wal-Mart's struggles would seem to be at odds with the prevailing view that the US economy is firm enough to support a reduction in the pace of stimulus.