Wall Street hit by weak retail sales data

US stocks plunged to their lowest level in ten months after Citigroup (NYSE:C) revealed a record $9.8bn quarterly loss and an unexpected decline in retail sales eroded confidence in the consumer sector.

Concerns about problems in Citi's consumer business and fears of further big writedowns in the financial sector sent equities into a spin. Energy stocks also hit the skids as the crude oil price retreated amid fears of weakening US demand.

Even the prospect of sweeping interest rate cuts did little to stem losses as traders bet the US economy was heading for a sharp downturn.

The S&P 500 fell 2.5 per cent to 1,380.95, its lowest level since March. The sell-off was broad-based, with only 24 companies trading in positive territory. The S&P moved further below its 80-week moving average, a technical support level last breached five years ago.

The Dow Jones Industrial Average fell 2.2 per cent to 12,501.11 with Boeing among the leading bluechip fallers amid unconfirmed reports the company may announce more delays to its 787 Dreamliner jet. The Nasdaq Composite fell 2.5 per cent to 2,417.59.

Stocks hit reverse gear after Citigroup wrote off $18.1bn in subprime-related losses causing the bank to sink to a massive fourth-quarter loss and slash its dividend by 40 per cent.

Traders were expecting Citi to "kitchen sink" the fourth quarter, but the $9.8bn loss still came as a shock to some analysts, who had forecast about half that amount.

Citi's consumer credit costs increased $5.4bn and included a $3.85bn charge to shore up loan loss reserves, suggesting the bank is heavily exposed to the weak US consumer loan market. The stock plunged 7.3 per cent to $26.94.

Citi and Merrill Lynch said they would raise a total of $21.1bn in fresh capital to help shore up their weakened balance sheets. Merrill, which reports fourth-quarter results on Thursday, fell 5.3 per cent to $53.01.

Elsewhere, Moneygram sank 49.5 per cent to $6.15 after the payment services company said net unrealised losses on the value of asset-backed securities rose from $571m to $860m.

State Street (NYSE:SBZ), the money manager, fell 5.9 per cent to $79.82 after its fourth-quarter earnings fell 28 per cent and it set aside $618m to settle subprime-related legal claims.

Consumer companies were also pummelled on Tuesday after retail sales capped their worst year since 2002 with a 0.4 per cent decline in December, the first monthly fall since June.

Recent same-store sales results at mid and upmarket retailers have been poor but economists had still forecast an unchanged reading.

The sales decline added to fears that US consumers, faced with falling house prices and rising mortgage costs, were trimming their spending on non-essentials.

"A lot of the data are pointing to either very slow growth or a recession at this point," said Brian Gendreau, investment strategist at ING Investment Management.

Williams-Sonoma (NYSE:WSM) fell 9.9 per cent to $20.01 after the home furnishing retailer reported a decline in same-store sales and cut its full-year outlook.

Sears Holdings (NASDAQ:SHLD) and Nordstrom (NYSE:JWN), the department store chains, fell 5.9 per cent to $86.02 and 5 per cent to $30.17 respectively.

In technology Apple's shares plunged 5.5 per cent to $169.04 after investors reacted with disappointment to a range of new product launches. Intel (NASDAQ:INTC) closed only 1.7 per cent lower at $22.69 but the shares plunged 10 per cent after-hours. The chipmaker reported a 51 per cent increase in net income to $2.27bn, narrowly missing Wall Street's estimates.

A combination of worrying employment data, a manufacturing slowdown and retail weakness have convinced traders that nothing less than a 50 basis point interest rate cut at the end of this month will do.

Ben Bernanke, Federal Reserve chairman, last week assured the market that the Fed was prepared to take "substantive" action on rates.

However many traders still believe the prospect of substantial easing is too little, too late: "The Fed is way behind the curve," Todd Salamone, vice president of research at Schaeffer's Investment Research, said.

Equity markets usually welcome interest rate cuts, but some analysts fear an emergency 75bp cut would indicate the Fed believes the US economy is severely threatened. "I don't think they will go with an inter-meeting move, as that would signal panic," Mr Gendreau said.

An unexpected decline in producer prices last month may give the Fed more room more manoeuvre. Producer prices fell 0.1 per cent in December. However, for the year, headline producer prices rose 6.3 per cent, the largest increase since 1981.