Market Perspective for November 17, 2014

Japan’s economy dipped into recession as expected in the third quarter. The announcement prompted a near 3 percent drop in the Nikkei and a small rally in the yen. The continued slowdown in the Japanese economy comes after a significant decline in the second quarter, caused by a planned hike in the sales tax, which led Japanese consumers and businesses to make purchases before the tax took effect. Another hike in the sales tax is planned for October 2015, but it’s expected a vote will be called early so that voters can decide the issue. If Japan delays the tax, the yen will likely depreciate further. The sell-off in Japan weighed on European markets, but the main impact, if any, will be felt in the currency markets.

In the United States, retail earnings season is in full swing. Wal-Mart (WMT) delivered a positive report and helped the retail sector rally to new highs for the year. This week, Best Buy (BBY), Home Depot (HD), Staples (SPLS), Target (TGT) and Lowe’s (LOW) headline a slew of retail earnings reports. Last week we also learned that retail sales were stronger than expected in October. The continued drop in gasoline prices is having a positive impact on the willingness of consumers to spend and we’ll likely see some optimistic guidance this week from retailers.

In economic data, domestic producer and consumer price inflation for October will be out this week. Both are expected to show deflation thanks to the drop in oil prices. On Wednesday, we’ll see the minutes of the last Fed meeting, when the decision to end quantitative easing was made. Later this week, the flash November PMIs for many nations will be released.

Major indexes have spent two weeks consolidating their gains following the rally that began in mid-October. Further consolidation or a mild pullback wouldn’t be a surprise given the bullish run. Oil still hasn’t rebounded and any bounce could weigh on the Dow Transports, which has been one of the strongest indexes in recent weeks.

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