By  on August 13, 2007

Equity markets closed Friday in relative calm after another roller-coaster week, taking retail stocks along for the ride, as Wall Street digested the Federal Reserve's decision to leave a key interest rate target unchanged and, instead, infuse the troubled credit markets with liquidity.

The Dow Jones Industrial Average lost 0.2 percent to 13,239.54; the Nasdaq slipped 0.5 percent to 2544.89, and the S&P 500 gained 0.04 percent to 1,453.64.

The S&P Retail Index closed the week up 0.3 percent to 470.82.

On Friday, the Fed said it would provide liquidity "to facilitate the orderly functioning of financial markets."

Before the U.S. stock market opened, the Fed pumped $19 billion into the banking system to keep the federal funds interest rate at 5.25 percent. That is the interest rate that banks charge each other for overnight loans, and is one of the areas where the Fed has some measure of influence. By the end of the day, the Fed pumped a total of $38 billion into the banking system.

"The Fed is trying to calm down the markets by injecting liquidity into the fixed income markets," said Needham & Co. LLC analyst Christine Chen. "Liquidity in the credit markets is having a good balance between buyers and sellers and between supply and demand, and right now there are no buyers because everyone is waiting for risk to be repriced; it was too easy to get a loan."

Chen said the Fed's statement can be read two ways. One is that the Fed is taking action that will benefit the markets. The second is the Fed action translates into a recognition of a problem.

"That they actually see a problem is not so good, hence why the market is all over the place," Chen said. "No one really knows and [Wall] Street hates uncertainty, and for retail in general, it once again brings up concerns about consumer spending."

Chen expects retail stock volatility to last throughout the summer on fears a credit crunch, whether in the subprime mortgage sector or beyond, will trickle down to the average consumer.Investors and analysts are hoping for back-to-school shopping to pick up after weak consumer traffic caused the majority of apparel retailers to miss same-store sales expectations for July, which was reported last week.

"We will keep a close eye over the next few weeks to see if, in fact, back-to-school and back-to-work shopping is simply starting later this year or if the problem is more systematic," said Telsey Advisory Group founder Dana Telsey in a research note. "We continue to believe that in this challenging consumer environment and hypercompetitive retail landscape, it is imperative that retailers turn wants into needs with innovative marketing and trend-right merchandise."

And Wall Street will be looking to department stores such as Macy's Inc.; Nordstrom Inc.; J.C. Penney Co., and Kohl's Corp. to report second-quarter results this week.

"We expect Macy's to post results to the high end of their downward revised [earnings per share] range for the quarter as sales for July were within the planned range," said UBS analysts Jeffrey Edelman, Brian Nagel and Michelle Tan in a joint research note. "We expect any downward revisions to full year to be modest considering that [the second quarter] is a small quarter and catalysts for improvement are skewed to [second half]."

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