Oil, Retail Sales Push Stocks Lower

Indexes continued their slide from the previous session as crude rebounded and a weak retail sales report sparked worries about consumer spending

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Major U.S. stock indexes closed mostly lower Wednesday as a spike in oil prices, disappointing July retail sales data and some weaker-than-expected corporate earnings reports limited buying activity in the market. Some traders were unwinding their options positions before Friday's expiry, but others were covering short positions, according to S&P MarketScope.

Bonds fell. Oil futures soared after data showed surprisingly low gasoline inventories. Gold futures closed higher, even though the dollar index also gained ground.

Increased East-West tensions over Russia’s military action in Georgia are causing unease in the market, according to S&P MarketScope.

On Wednesday, the Dow Jones industrial average finished lower by 109.51 points, or 0.94%, at 11,532.96. The broader S&P 500 lost 3.76 points, or 0.29%, to end at 1,285.83. The tech-heavy Nasdaq composite index dipped 1.99 points, or 0.08%, to close at 2,428.62.

On the New York Stock Exchange, 18 stocks fell in price for every 14 that advanced, with. The ratio on the Nasdaq was 15-13 positive as Nvidia (NVDA), Applied Materials (AMAT), and Apple (AAPL) rose.

Financial stocks took another hit Wednesday after Merrill Lynch (AMAT) downgraded Morgan Stanley (MS) to neutral from buy, Goldman Sachs (GS) to underperform from buy, and Lehman Brothers (LEH) to ubderperform from neutral.

U.S. retail sales slipped 0.1% in July, and below the +0.2% expected. Moreover, the ex-auto component was up 0.4%, just below the +0.5% expected. June retail and ex-auto sales were revised up to 0.3% and 0.9%, respectively (previously +0.1% and +0.8%). Excluding autos, gas station sales and building materials, July sales were up 0.3% from a 0.5% increase in June. Gas station sales rose 0.8%, while vehicle sales plunged 2.4%, its 6th consecutive monthly decline. Building materials rebounded 0.3%, and clothing sales were up 0.2%. Food and beverage sales rose 0.4%.

Lehman Brothers economist Michelle Meyer said in a note Wednesday that “[o]n balance, we judge the Retail Sales data to be a weak report.” She noted that about 87% of the fiscal stimulus had been delivered by the end of July, providing consumers with extra cash to allocate toward consumption. “However, consumption has been disappointing … [t]he outlook for consumers is grim.”

Import prices jumped 1.7% in July, led by a 4.0% rise in petroleum prices. The rise was greater than the market expectation of 1.2%. Nonpetroleum import prices surged 0.9%, reflecting the recent weakness of the dollar. Export prices nearly kept pace, rising 1.4% (0.8% excluding agriculture.

"The high import prices will put upward pressure on consumer prices in tomorrow's [July CPI] release," says S&P Economics.

Business inventories rose 0.7% in June, while sales surged 1.7%. The inventory rise was a bit more than the 0.5% expected by the market. The strong sales lowered the inventory/sales ratio to 1.23 months from 1.24 in May and 1.27 a year earlier.

"The higher inventories are good news for second-quarter GDP, which could be close to 3% when revised," says S&P Economics.

Dow Jones Newswires reported that Minneapolis Fed President Stern said "[t]he pace of expansion has been subdued, and I would expect that to continue, not just because of credit conditions." "I expect the expansion to remain modest certainly into next year because I think it will take some time for the headwinds to dissipate. They are not going to dissipate, in my judgment, that rapidly."

September West Texas Intermediate crude oil futures were up $2.89 to $115.90 per barrel following an Energy Dept. report that said U.S. commercial crude oil inventories fell 400,000 barrels in the week ended Aug. 8. At 296.