A surprise drop in US retail sales and unexpected rise in initial jobless claims dented sentiment on Wall Street this afternoon.

Investors fretted about the report from the Commerce Department, which showed American retail sales falling 0.1% in July, worse than Bloomberg’s median economist estimate from an originally reported increase of 0.6% in June (the data for June was revised to show a 0.8% gain). This came as a surprise because the market was expecting the popular cash-for-clunkers automobile incentive programme to lift spending.

Even after excluding motor vehicle sales and parts, retail sales fell 0.6% in July following a 0.5% rise the month before, indicating that the underlying trends in spending remain weak as consumers cut back due to difficult employment conditions. The majority of economists surveyed by Bloomberg were expecting retail sales excluding autos to rise by 0.1%.

‘Consumers continued to maintain a tight hold on their wallets, worried about rising unemployment, falling home prices, and tight credit,’ said Steven Wood of Insight Economics. ‘Overall economic activity will not fully revive until consumer spending rebounds.’ [1]

A drop in retail sales and elevated unemployment is worrying because it exerts pressures on revenues and hampers organic growth. Companies may be able to bolster their bottom line profits by scaling back on their labour force, but may only provide a temporary solution.

In the meantime, a separate report from the Labour Department revealed that the number of Americans claiming first-time unemployment benefits (initial jobless claims) rose to 558,000 in the week ending August 8 from 554,000 the week before. The four-week moving average for initial jobless claims, a preferred measure which aims to smooth volatility in the weekly data, rose by 8,500 to 565,000, the highest since July 18.

There was hope, however; the total number of Americans claiming unemployment benefits for more than a week (continuing jobless claims) tumbled by 141,000 during the week ended August 1 to 6.202 million. This is the lowest since April 11 and suggests that demand for labour is slowly starting to pick up.

By around 3:30pm (London time), the Dow Jones Industrial Average was trading 14.59 points (-0.16%) in the red at 9347.02, while the more representative S&P 500 managed to edge 0.4 points (+0.04%) above its previous close to 1006.21.

Kohl’s Corp, the fourth-largest US department-store chain, was among the casualties this afternoon down 2.7% to $50.87 after providing a dismal outlook for the rest of the year and issuing earnings forecasts that trailed consensus expectations.

The company said it expects its third-quarter earnings to come in between 40 cents and 44 cents a share, trailing Reuters’ expectations of 47 cents a share. It also anticipates fourth-quarter earnings to come in between 99 cents and $1.13 a share, weaker than expectations of $1.13 a share.

Homebuilders, which have been at the centre of recent rallies, were knocked back after Citigroup hit D.R. Horton, the largest US homebuilder by sales, with a ‘sell’ recommendation. KB Home was also downgraded to ‘underperform’ today. Shares of D.R. Horton fell 3% to 13.05, while KB Home declined 1.8% to $17.95.

Bucking the negative trend was Wal-Mart, which rose 1.5% to $51.26 after unveiling that its international business experienced acceleration in profit growth and underlying sales during the second quarter. It said that international operating profit at constant exchange rates surged 13.3% to $1.38 billion in the three months to July. International sales were 11.5% higher to $28.2 billion, it said today.

‘International is our fastest growing business. Asda is performing especially well and continues to grow market share,’ said chief executive Mike Duke. [2]

Financials helped support Wall Street today, after John Paulson’s hedge fund started to acquire stakes across the sector. Mr Paulson is best known for his US housing market bets, which helped him earn an estimated $2.5 billion last year. It has emerged that he has bought shares in Bank of America and Goldman Sachs. He is also adding to stakes in gold companies.

Shares of Bank of America climbed 4.7% to $16.68, Citigroup rose 3% to $4.10, and Goldman Sachs edged 0.7% higher to $164.9. Elsewhere, insurer AIG climbed nearly 1% to $25.58 a share, perhaps on the back of news concerning its consumer loan unit, which is said to be slashing an additional 900 jobs.

[1] Source: Bloomberg News (13 August 2009)
[2] Source: Reuters News (13 August 2009)

By Anthony Grech, Research Analyst, IG Index.

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