The US consumer is set to collapse

Why are expectation-beating results from discount retailer Wal-Mart such a source of worry for investors? Because they imply tough times ahead for the retail sector as a whole. John Stepek explains.

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Central bank governor Sultan Bin Nasser al-Suwaidi said the dollar's recent slump will result in a "review" of the peg. The UAE wouldn't be the first Gulf State to abandon the greenback. Kuwait ditched its dollar peg in May this year and the others are worried too.

The trouble is that US monetary policy geared towards a weak and rapidly slowing economy is entirely unsuitable for the UAE, and for many of its peers in the Gulf. The weak dollar has helped push inflation in Saudi Arabia to 9.3%, for example.

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And there's no sign that the US will be reversing its policy any time soon. In fact, we could have more rate cuts before the year is out...

The US housing market has been in decline for some time, but so far the US consumer - a hardy specimen - has yet to fold. However, the latest news from retailers suggests the problems may be beginning.

Earlier this week, Wal-Mart (WMT), the world's biggest retailer, actually beat Wall Street's expectations with its third-quarter results. Earnings rose by 10.4% on last year to $2.86bn.

A retailer beating earnings forecasts might normally be good news for the rest of the sector. However, Wal-Mart is something of a special circumstance. As MoneyWeek's Paul Hill recently pointed out, Wal-Mart is the best-placed retailer to benefit when hard times roll around in the US. After all, consumers still have to eat and wash, even in hard times - what changes is where they buy their food and soap.

Wal-Mart's goal is to offer "a huge range of good-quality merchandise at the lowest possible prices." The company has "renewed" this focus on pricing, according to Forbes. And as consumers tighten their belts, suddenly price becomes a lot more important to them hence they ditch the more costly upmarket shops and head to Wal-Mart. (Subscribers can read Paul's full low-down here)

Certainly, Wal-Mart's performance hasn't been repeated by its rivals. JC Penney (JCP), the country's third-largest department store, yesterday reported its first profit fall in three quarters, and sharply cut its forecast for the fourth quarter, which covers the Christmas period.

"We were disappointed to see sales weaken dramatically in September and October," said chief executive Myron Ullman. Profit margins were also squeezed as the group cut prices in an attempt to attract customers. Mr Ullman blamed rising fuel prices, the weak property market, and that old retail favourite, the weather, for the poor showing.

Certainly the weather has been unusually warm, but the housing market has also been unusually weak, and fuel prices unusually high. Only one of those features is temporary - housing and fuel will stay problematic, even if the snow starts falling early in New York this year.

So it looks like the Fed will be tempted to cut rates even further - and that means the dollar will stay on the downward track too.

We've more on the weak dollar, and what could replace it, in this week's

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And just a reminder with Christmas round the corner, MoneyWeek has the perfect stocking filler for you. "How Much?!" is a compilation of some of the best bits from MoneyWeek's Bottom Line' column. To order your copy click here.

Turning to the wider markets

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London's FTSE 100 index closed near its lowest levels of the day, down 72 points at 6,359. Credit checking agency Experian led the fallers, and there were also losses for banks including Royal Bank of Scotland and Barclays. For a full market report, see: London market close.

Elsewhere in Europe, the Paris CAC-40 was down 52 points, at 5,561, whilst in Frankfurt the DAX-30 closed 116 points lower, at 7,667.

On Wall Street, US stocks closed lower for a third day in a row due to negative investor reaction to a jump in weekly jobless claims plus ongoing credit concerns. The Dow Jones fell 121 points to close at 13,110. The tech-rich Nasdaq was off 25 points, at 2,618. And the broader S&P 500 was down 19 points at 1,451.

In Asia, stocks also closed lower on fears of economic slowdowns in both Japan and the US. The Japanese Nikkei was 241 points weaker, at 15,154. And in Hong Kong, the Hang Seng was down 1,136 at 27,614.

Crude oil had risen to $93.67 this morning and Brent spot was at $91.37 in London.

Spot gold slumped over $35 yesterday to a two-week low of $782.35, but had risen back to $789.00 this morning. Silver, meanwhile, had edged up to $14.49.

Turning to the currency markets, the pound was at was at 2.0418 against the dollar and 1.3983 against the euro. And the dollar was at 0.6846 against the euro and 110.16 against the Japanese yen.

And in London this morning, Nationwide Building Society predicted that the UK property market would stagnate next year due to a 'more subdued outlook' on the demand side thanks to slowing economic growth and lower interest rates. The announcement follows a similar prediction made by property website Rightmove last month.

Finally, our recommended article for today...

A real cash cow: why food production is big news

- Ten years ago, investors started to wake up to the fact that there was a global shortage of raw materials to feed the Chinese manufacturing dragon. Now they are waking up to the fact that the world needs more food. For more on how this new investment story is set to unfold - and some of the stocks to watch, click here: A real cash cow: why food production is big news

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.