Dow falls as investors digest strong retail sales and earnings

What’s driving markets

About 10% of the S&P 500 index companies are due to report this week, and the majority of those who have already done so have beaten expectations on both earnings and revenues, according to Richard Hunter, head of markets at Interactive Investor.

Results from JPMorgan Chase
JPM,
-0.50%,
Citigroup
C,
+0.47%
and Wells Fargo
WFC,
+0.71%
were mostly well-received by traders on Friday. On Tuesday it was the turn of their peers, including Goldman Sachs
GS,
-1.74%
and Bank of America
BAC,
+2.11%
and BNY Mellon
BK,
+3.96%
to release numbers. All three produced results beating Wall Street consensus.

Johnson & Johnson
JNJ,
-1.46%
and Lockheed Martin
LMT,
-0.17%
also published results in the morning, while Omnicom
OMC,
+0.36%
and Interactive Brokers
IBKR,
+0.56%
will release reports after the closing bell.

In data reported Tuesday morning, U.S. September retail sales were stronger than expected, raising the possibility of the Federal Reserve at least keeping interest rates higher for longer in its quest to lower inflation.

Retail spending in September jumped 0.7%, beating forecasts. Stripping out auto sales, retail sales still popped 0.6% last month. Economists polled by the Wall Street Journal expected a 0.2% increase.

See: U.S. retail sales rise sharply due to strong car sales and higher gas prices

“Consumer spending shows little sign of flagging,” said Robert Frick, corporate economist at Navy Federal Credit Union. There may be signs of sagging credit card use and a switch to cash with more debit card use. “As long as the jobs market remains healthy, consumers should have the cash and confidence to maintain spending,” Frick said. 

Treasury yields headed higher toward 16- and 17-year highs. The 10-year Treasury note
BX:TMUBMUSD10Y
climbed 13 basis points to hit around 4.84%, nearing a level last seen in early August 2007.

Traders say there’s a nearly 88% chance the Fed sticks with its current federal funds rate at its November meeting, according to the CME FedWatch Tool, though that’s down from Monday, when traders wagered a nearly 95% chance of another pause on rates.

Andres Garcia-Amaya, founder and CEO of Zoe Financial, said the strong retail sales are good news. “It’s another indicator that a recession is not happening” and is another data point for the soft-landing camp that thinks the Fed can pull off interest rate increases without an economic downturn.

Even though retail sales exceeded expectations, Garcia-Amaya didn’t see them as a “blow-out.” That’s a good thing because too much would be too inflationary. So Tuesday’s stock market noise connected to retail sales would lessen as investors turned back to earnings reports, he said.

Still, Richmond Fed President Tom Barkin said on Tuesday that the U.S. economy may be softer than the data suggest and this weakness may be helping to moderate inflation pressure. “There’s a story — a plausible story — that weakening demand is already working to bring inflation down to 2%,” Barkin said in a speech to the Real Estate Roundtable in Washington DC.

While retail sales were strong in September and estimates of third quarter GDP are being revised higher, Barkin said that business contacts are telling him that demand “is softening.”

In other economic data points, U.S. home builder confidence fell to its lowest level since January. U.S. industrial output increased 0.3% in September, beating a forecasted 0.1% increase.

Meanwhile, investors kept an eye on geopolitical news with U.S. President Joe Biden due to visit Israel and neighboring countries in coming days to help calm nerves that the Israel-Hamas conflict will cause a greater conflagration in the region. In Washington DC, the U.S. House of Congress failed to elect a new Speaker.

Companies in focus

• Bank of America Corp.
  BAC,
  +2.11%
  stock rose 2.4% Tuesday after it reported said a rise in clients and accounts across its business helped boost its third-quarter profit.
• Johnson & Johnson’s
  JNJ,
  -1.46%
  stock fell 1% Tuesday morning, after the medtech and drug company posted better-than-expected third-quarter earnings and raised its profit guidance.
• Lockheed Martin Corp.
  LMT,
  -0.17%
  dipped 0.7% after the defense manufacturer said Tuesday it had net income of $1.7 billion, or $6.73 a share, in the third quarter, compared with income of $1.8 billion, or $6.71 a share, in the year-earlier period. 
• Goldman Sachs Group Inc.
  GS,
  -1.74%
  stock fell 1.6% after reporting a lower third-quarter profit but managed to beat reduced earnings expectations on Tuesday.

—-Jamie Chisholm contributed.