Dow Jones, S&P 500, Nasdaq seen weaker after retail sales beat forecasts in wake of stubborn inflation data

9.40am: January retail sales surge on unusually warm weather

US stocks kicked off the day’s trading in the red despite US retail sales for January coming in ahead of expectations, with headline sales up 3% compared to the forecast 2%.

Just after the market opened, the Dow Jones Industrial Average had shed 180 points or 0.5% at 33,909 points, the S&P 500 had slipped 18 points or 0.4% at 4,117 points, and the Nasdaq Composite was down 33 points or 0.3% at 11,926 points.

ING chief international economist James Knightley noted that weather had played a significant role in January’s very strong retail sales report.

“Remember that December experienced very cold temperatures with heavy snowfall disrupting travel in many parts of the nation,” he said. “This also depressed spending with November and December both posting 1.1% month-over-month declines.”

Knightley continued: “Therefore we should expect a rebound in January anyway, but then very warm temperatures providing an additional stimulus that tempted more people to leave their homes and spend.”

He cautioned with weather patterns returning to more seasonal norms in February that there could be a significant correction next month, especially with household finances remaining under pressure from high inflation and slowing wage growth.

“Consequently, today’s numbers back the case for a March and probably a May hike, but it shouldn’t push the case for Fed tightening beyond that,” Knightley said.

Pantheon Macroeconomics senior US economist Kieran Clancy said that January’s strength in retail sales was unlikely to last, also noting the unseasonably warm weather during the month.

“That won’t stop markets fretting that the economy is impervious to the Fed, but we think that view is just wrong,” Clancy said.  

“Once core sales correct, auto sales will be left to do the heavy lifting if consumption is to avoid outright declines over the coming quarters. We think that’s a decent bet, at least in the near term, but eventually, the pent-up demand for autos will weaken in the face of significantly higher financing costs.”

9.20am: Retail sales rebound

US stock futures edged down further after data showed a rebound in US retail sales, a sign of economic strength that could encourage the Federal Reserve to keep combating inflation by raising interest rates.

US retail sales rose 3% in January, ahead of the 1.9% forecast and up from a 1.1% drop in December, another sign of strength in the economy hot on the heels of bumper jobs numbers 10 days ago and a stubborn inflation reading yesterday.

With 10 minutes to go to the New York open, futures for the Dow Jones Industrial Average, the broader S&P 500 index and the tech-laden Nasdaq-100 were all off 0.5%.

6.30am: Retail sales for January due

Wall Street is expected to open lower as investors look to January’s retail sales data for further direction after inflation numbers for the same month yesterday revealed that prices remain stubbornly high. 

Futures for the Dow Jones Industrial Average (DJIA) fell 0.2% in Wednesday pre-market trading, while those for the broader S&P 500 index declined 0.3%, and contracts for the Nasdaq-100 shed 0.4%.

January’s consumer price index (CPI) came in higher than expected at 6.4% year-over-year, although the monthly rise of 0.5% was in line. The core index, which excludes the food and energy components, rose 0.4% month-over-month, on par with the Street’s expectation. Core inflation came in up 5.6% over the 12 months to January, ahead of the expected 5.4%. 

US stock ended mixed following the CPI release, with the DJIA closing down 0.5% at 34,089 on Tuesday, while the S&P 500 ended flat, 1 point lower at 4,136, but the Nasdaq Composite gained 0.6% to 11,960. 

“The inflation report really needed to over-deliver after the red-hot labour market figures earlier in the month and it simply didn’t do it,” commented Craig Erlam, senior market analyst at OANDA. “The trend remains positive but it may be stalling and that won’t give the Fed (Federal Reserve) any encouragement to stop raising interest rates.”

“The next 25 basis point hike was never really in doubt anyway but now markets are factoring in much more, including another in May and a good chance of one more in June,” Erlam said.

Meanwhile, US retail sales for January are expected to have bounced back from the weakness seen in December, TickMill Group market analyst James Harte noted. 

“Consensus forecasts are built around 0.9% for the core figure, up from -1.1% prior, and 1.9% for the headline figure, up from -1.1% prior,” Harte said. “Resilience in the US economy, particularly coupled with a fresh jump in inflation, is supporting the view that the Fed will continue with hikes for longer than expected this year.”