MarketView for August 30

Summary

It was a down day on Wall Street on Thursday after several days of muted trading as investors took a defensive posture before Federal Reserve Chairman Ben Bernanke's much-awaited speech on Friday. Bernanke, due to speak to central bankers in Jackson Hole, Wyoming, at 10 a.m. on Friday, is expected to keep markets guessing about the timing of another round of bond purchases.

The mood was cautious in financial markets due to the high stakes surrounding the Fed chairman's speech as well as a meeting of the European Central Bank on Thursday that is expected to take pressure off highly indebted countries. Central banks face pressure to combat the weakness in the economy.

In a sign of slowing growth, shares of mining companies fell as iron ore prices fell to their lowest level since 2009. Shares of BHP Billiton closed down 3.8 percent at $58.11. In addition, all 10 S&P industry sectors were lower, with technology, energy and materials leading the decline. The benchmark index dipped below the 1,400 mark at the close for the first time since August 6. The S&P has barely moved over the prior three sessions - resulting in a decline of merely 0.05 percent - and hasn't closed with a 1 percent move in either direction since August 3.

Meanwhile, the economic data over the past two weeks has been a bit stronger than expected, leading to some skepticism over whether the Fed will announce a new round of bond buying at its September meeting. Economic data showed consumer spending enjoyed its biggest rise in five months while the number of Americans filing new claims for jobless benefits held steady last week.

The Labor Department said first-time applications for state unemployment benefits were unchanged last week at 374,000. The four-week moving average for new claims, a better measure of labor market trends, rose 1,500 to 370,250 - a level that is consistent with only sluggish hiring.

The level of new claims last week was 10,000 above where it stood at the beginning of the month, suggesting job growth moderated. In July employers had added 163,000 workers, which was a sharp step up from June, when the economy created only 64,000 new jobs.

Volume continued to be anemic with the week's daily average so far showing that 4.49 billion shares changed hands on the three major equity exchanges. This week's four days so far are among the five lowest for volume all year.

Retailers posted better-than-expected sales gains in August at stores open at least a year, partially because of back-to-school buying and setting the stage for a strong third quarter. Despite the August sales results, the Morgan Stanley retail index fell 0.6 percent, weighed down by the decline in Sears Holdings. Sears' shares fell 7.9 percent to $52.90 after S&P Dow Jones removed the company from the benchmark S&P 500 index, effective after the close of trading on September 4. LyondellBasell Industries, which will replace Sears, rose 3.8 percent to $48.67.

Consumers to the Rescue

Consumer spending got off to a fairly firm start in the third quarter, rising by the most in five months and offering hope economic growth would pick up this quarter. The Commerce Department said consumer spending increased 0.4 percent in July after a flat reading in June. With a gauge of prices holding steady, spending was also up 0.4 percent on an inflation-adjusted basis, which was also the largest increase since February.

While separate reports from U.S. retailers indicated some of the spending momentum carried into August, economists expect spending to cool a bit in the months ahead because of sluggish income growth and a recent rise in gasoline prices. A range of retail outlets from Costco Wholesale to Limited Brands chalked up better-than-expected sales gains.

In the second quarter, consumption had expanded at the slowest pace in a year, helping to hold back economic growth to a modest 1.7 percent annual rate.

A price index for personal spending was flat after edging up 0.1 percent in June. In the 12 months through July, this index was up just 1.3 percent -- the smallest gain since October 2009. A core measure that strips out food and energy costs also held steady last for the first time since September. Over the past 12 month, it has risen 1.6 percent, the least since October.

The Fed aims for inflation of 2 percent. Both the overall and core indexes have been below that target since March, a factor some analysts said could tip the balance toward more easing in the debate at the central bank.

Last month, household income increased 0.3 percent after rising by the same margin in June. Income available to households after stripping out inflation and taxes increased 0.3 percent after gaining 0.2 percent in June. With spending a touch above income growth, the saving rate slipped to 4.2 percent in July from 4.3 percent the prior month.

Retailers Pleased with August – Looking forward to September

Nearly all retailers posted better-than-expected sales gains in August at stores open at least a year as parents and students wrapped up back-to-school purchases, setting the stage for a strong third quarter. August same-store sales rose 3.6 percent at retailers tracked by Thomson Reuters I/B/E/S, trumping forecasts for a 2 percent rise.

Retailers are still dealing with a somewhat difficult climate. Earlier this week the U.S. Commerce Department said consumer spending in the second quarter was revised up a notch but was still below the first quarter's pace. Consumer spending accounts for about 70 percent of U.S. economic activity.

Gap's 9 percent rise in same-store sales topped analysts' forecast for a 5.4 percent increase. The results were driven by strong back-to-school sales, particularly at its Old Navy chain, where North American same-store sales jumped 12 percent. Same-store sales are an important measure of retailer performance because they strip out the effects of store openings and closings. Gap's shares rose 3 percent to hit their highest in a year.

Teen retailers Wet Seal and Zumiez were the only companies to miss sales estimates. A strong August at TJX has the off-price retailer now expecting third-quarter earnings per share near the high end of its estimated range of 56 cents to 59 cents.

Nordstrom saw a large improvement as a result of the timing of its Anniversary Sale. Eight days of the sale, which offered discounts on fall merchandise, fell in August this year versus just one day in August of 2011. Same-store sales rose 21 percent, blowing past analysts' expectations for an 11.1 percent rise.

At Target sales were stronger in the second half of the month as shoppers responded to compelling value for their back-to-school and back-to-college shopping. Same-store sales were strongest in food, followed by health and beauty products.