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Wal-Mart drags Dow deep into the red

Share have fallen sharply on Wall Street today, sparked by disappointing quarterly results and growing fears that the Fed may announce stimulus as soon as its next policy meeting.

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With an hour to go to the close in New York, the Dow was trading down 218 points or 1.42% at 15,119, the S&P 500 was off 1.41% at 1661.5 and the NASDAQ 100 was down 1.61% at 3079.2, the biggest falls for all three benchmarks since June.

The general consensus is that the Fed will announce a reduction in the amount of its monthly bond purchases at the FOMC meeting next month, and that line of thinking was bolstered today by jobless claims that fell to the lowest level in almost six years.

I think the decision is far from a foregone conclusion though. Although the labour market has been improving by most metrics, the Bureau of Labour Statistics also released data today showing a drop in real average weekly earnings of 0.5% from June to July, owing to a 0.2% decrease in average hourly earnings and a 0.3% decrease in the average working week. That’s not the end of the story: average hourly earnings fell 0.1% in July year-on-year

This data might explain why consumer spending seems to be constrained, as evidenced by Wal-Mart’s lowering of its full-year sales forecasts today.

Although today’s CPI data, showing a 0.2% rise in July, shows inflation is not quite as stagnant as it has been in recent months, the Fed’s preferred measure, the PCE price index, is still well-below the stated 2% target. That might prove to be a stumbling block to tapering as early as next month.

Voting member of the FOMC James Bullard alluded to this in a speech yesterday in Kentucky. ‘Inflation has been running very low. I have been concerned about low inflation,’ he said, adding that the FOMC ‘has set a target. They've set it at 2%. Once you've set it, you had better have some credibility that you are going to hit it’.

Tomorrow we have a first reading on consumer sentiment for August from the University of Michigan. Their sentiment index is expected to improve from June’s final reading of 85.1 to a level of 85.5.

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