(Bloomberg) — Stocks climbed and bonds tumbled as retail sales data underscored the strength of the world’s largest economy, allaying fears the Federal Reserve’s high rates would be risking a pronounced slowdown.
Equities pushed higher across the board, with the S&P 500 up for a sixth straight session. Walmart Inc. — a barometer of growth — soared after raising its sales guidance. Treasury yields jumped, with the move led by shorter maturities. Data showed retail sales accelerated by more than forecast while jobless claims dropped to the lowest level since early July. Swap traders further reduced their bets on aggressive central-bank rate cuts.
“We’re back to an environment where good news is good news and bad news is bad news,” said Bret Kenwell at eToro. “Investors and consumers want inflation to go lower — but not at the expense of the economy. Today’s stronger-than-expected retail sales figure quiets some of the fears the US may be slipping into a recession.”
Given the recent worries over the labor market, the jobless claims data was another positive, he noted. After a weak payrolls report, there were worries that the Fed waited too long to cut rates. While it would still be appropriate to lower rates next month, the data should buy officials some time until the September meeting, Kenwell concluded.
Fed Bank of St. Louis President Alberto Musalem said he believes the time is approaching when it will be appropriate for the US central bank to reduce rates. In an interview with the Financial Times, his Atlanta counterpart Raphael Bostic said he is “open” to a reduction in September.
The S&P 500 rose 1.1%. The tech-heavy Nasdaq 100 rose 1.8%. The Russell 2000 Index of smaller companies climbed 1.8%. Treasury 10-year yields rose 11 basis points to 3.95%. Traders trimmed bets on a jumbo September Fed cut, pricing in less than 30 basis points of easing. They now see 94 basis points of cuts for 2024.
“Don’t bet against the American consumer,” said Capital Economics. “There was almost nothing in the July retail sales report for the ‘perma-bears’ to latch on to, with the rebound in retail sales led by a recovery in vehicle sales, but encouragingly broad-based with control group sales rising even further.”
To David Russell at TradeStation, investors fearing a potential recession or sharper slowdown have less to worry about.
“A soft landing is no longer a hope. It’s becoming a reality,” Russell said. “These numbers also suggest that recent market volatility wasn’t really a growth scare. It was just normal summer seasonality amplified by moves in the currency market.”
To Chris Zaccarelli Independent Advisor Alliance, the retail sales numbers were a blowout versus consensus, but more importantly it should lay to rest (at least for the moment) all of the “doom and gloom” that was expressed at the beginning of this month.
“This entire economic cycle has been a headscratcher from much higher-than-expected inflation to a much more resilient consumer than anyone could have forecast back in the dark days of 2020,” he noted.
If the economy continues to be resilient – especially in conjunction with slowing inflation – then the Fed can begin a rate cutting cycle without the economy entering recession and history shows this is an extremely positive environment for the stock market, he concluded.
“Today didn’t deliver any major curveballs” said Chris Larkin at E*Trade from Morgan Stanley. “More data like this could ease concerns that the economy is tilting toward recession, and take pressure off the Fed to cut rates more aggressively than they’d like to.”
Jim Baird at Plante Moran Financial Advisors says a recession over the coming months can’t be ruled out, but for now, the data seems to keep the potential for a soft landing in play.
To Jeff Roach at LPL Financial, solid disposable income growth gave the consumer ample ability to keep the retail economy growing. However, this report will not likely change the Fed’s calculus about cutting rates in September. Roach also cited recent remarks from Atlanta Fed President Raphael Bostic that the Fed cannot afford to be late in cutting rates as unemployment increases.
The jobs market — and what it means for consumer spending, the biggest driver of US economic activity — is a key factor in why the Fed is expected to start cutting interest rates next month. Measures of consumer sentiment have been subdued as the labor market cools and the presidential election nears, overshadowing progress in taming inflation.
“Investors should expect more volatility in the near term as the economic data likely give conflicting signals.”
Calm seemingly has been restored to Wall Street as US stocks steadied this week. But Deutsche Bank AG says investors still need to gird against wild asset swings to come.
“We expect volatility to stay at higher levels due to seasonality and change in markets which are no longer priced to perfection,” said Christian Nolting, Deutsche Bank’s global chief investment officer. Expectations have been reset after the once unstoppable equities rally stumbled on a weak jobs report and the“good news is now good news and bad news is bad news.”
Corporate Highlights:
- Cisco Systems Inc., the biggest maker of computer networking equipment, gave a bullish revenue forecast for the current period and announced plans to cut thousands of jobs as part of a strategy shift.
- Nike Inc. gained after Pershing Square Capital Management LP disclosed a new stake in the world’s largest sportswear company.
- Dell Technologies Inc. was added to JPMorgan Chase & Co.’s analyst focus list, citing an “attractive entry point.”
- Lenovo Group Ltd. reported better-than-expected quarterly profit, affirming hopes for a gradual computing industry recovery driven by global AI spending.
- Deere & Co. unexpectedly maintained its annual profit outlook as the world’s top tractor maker sought to cut costs in a slumping farm economy.
- Alibaba Group Holding Ltd. posted a disappointing 4% rise in revenue, after aggressive promotions failed to drive spending in an anemic Chinese consumer environment.
Key events this week:
- Japan tertiary index, Friday
- US housing starts, University of Michigan consumer sentiment, Friday
- Fed’s Austan Goolsbee speaks, Friday
- Canada housing starts, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 1.1% as of 10:01 a.m. New York time
- The Nasdaq 100 rose 1.8%
- The Dow Jones Industrial Average rose 1%
- The Stoxx Europe 600 rose 1.2%
- The MSCI World Index rose 0.9%
- Bloomberg Magnificent 7 Total Return Index rose 2.1%
- The Russell 2000 Index rose 1.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.4% to $1.0969
- The British pound was little changed at $1.2838
- The Japanese yen fell 1.2% to 149.14 per dollar
Cryptocurrencies
- Bitcoin rose 0.6% to $59,517.63
- Ether fell 0.4% to $2,665.51
Bonds
- The yield on 10-year Treasuries advanced 11 basis points to 3.95%
- Germany’s 10-year yield advanced eight basis points to 2.26%
- Britain’s 10-year yield advanced 10 basis points to 3.92%
Commodities
- West Texas Intermediate crude rose 1.4% to $78.05 a barrel
- Spot gold was little changed
This story was produced with the assistance of Bloomberg Automation.
–With assistance from John Viljoen and Richard Henderson.
More stories like this are available on bloomberg.com
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