(Bloomberg) — Stocks rose and bonds fell as retail sales data underscored the strength of the world’s largest economy, dispelling fears that the Federal Reserve’s high rates posed the risk of a pronounced slowdown.
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Stocks rose across the board, with the S&P 500 rising for the sixth consecutive session. Walmart Inc. — a barometer of growth — soared after raising its sales guidance. Treasury yields soared, with the move led by shorter maturities. The data showed that retail sales accelerated more than expected, while jobless claims fell to the lowest level since early July. Swap traders further trimmed their bets on aggressive central bank rate cuts.
“We are back in an environment where good news is good news and bad news is bad news,” said Bret Kenwell of eToro. “Investors and consumers want inflation to fall – but not at the expense of the economy. Current retail sales numbers, stronger than expected, allay some fears that the U.S. may be heading into recession.”
Given recent concerns about the job market, unemployment claims data was another positive, he noted. Following a weak payrolls report, concerns were raised that the Fed waited too long to cut rates. While it is still appropriate to cut rates next month, the data should give policymakers some time before the September meeting, Kenwell concluded.
St. Louis Fed Bank President Alberto Musalem said he believes the time is approaching when it will be appropriate for the U.S. central bank to cut rates. In an interview with the Financial Times, his Atlanta counterpart, Raphael Bostic, said he was “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 rose 1.9%. Wall Street’s “fear gauge” – the VIX – has fallen to around 15. This after hitting 65 last week during a market crisis.
10-year Treasury yields rose eight basis points to 3.92%. Traders scaled back bets on a huge Fed cut in September, pricing in less than 30 basis points of easing. They now foresee cuts of 92 basis points for 2024. The dollar has recovered from a four-month low.
“Don’t bet against the American consumer,” said Capital Economics. “There was almost nothing in the July retail sales report for the ‘permanent bears’ to hold on to, with the recovery in retail sales led by a recovery in vehicle sales, but encouragingly broad, with control group sales increasing even more. ”
For TradeStation’s David Russell, investors who fear a potential recession or a 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 has not really been a scare to growth. It was just normal summer seasonality, amplified by movements in the currency market.”
For Chris Zaccarelli Independent Advisor Alliance, the retail sales numbers were a blowout versus consensus, but most importantly they should set aside (at least for now) all the “doom and gloom” that was expressed earlier this month.
“This entire economic cycle has been a head-scratcher, from much higher-than-expected inflation to a much more resilient consumer than anyone could have predicted 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 going into recession, and history shows that this is an extremely positive environment for the stock market. , he concluded.
“Today didn’t bring any major hurdles,” said Chris Larkin of Morgan Stanley’s E*Trade. “More data like this could alleviate concerns that the economy is tilting toward recession and ease pressure on the Fed to cut rates more aggressively than it would like.”
The U.S. economy overall has thus far been robust enough to withstand an extended rate pause from the Fed, according to Don Rissmiller of Strategas.
“Small cracks in the economy mean there is a clear case for Fed rate cuts soon,” he said. “But there is no emergency that justifies a huge rate cut in current US economic data.”
Jim Baird of Plante Moran Financial Advisors says a recession in the coming months cannot be ruled out, but for now the data appears to keep the potential for a soft landing in play.
“Current data on retail sales and unemployment claims provide further evidence that the risk of recession remains low in the US, even as the economy slows from unsustainably strong levels of growth,” said Ronald Temple of Lazard. “The argument for the Fed to ease by 25 basis points is sound, but there is little evidence to suggest the need for a 50 basis point reduction.”
For Jeff Roach, of LPL Financial, the solid growth in disposable income has given consumers ample capacity to maintain the growth of the retail economy. However, this report is unlikely to change the Fed’s calculation on whether to cut rates in September. Roach also cited recent comments from Atlanta Fed President Raphael Bostic that the Fed cannot afford to delay cutting rates as unemployment rises.
The job market — and what that means for consumer spending, the biggest driver of U.S. 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 job market cools and the presidential election approaches, overshadowing progress in containing inflation.
“Investors should expect more volatility in the near term as economic data likely gives mixed signals.”
Calm has apparently been restored on Wall Street as US stocks have stabilized this week. But Deutsche Bank AG says investors still need to prepare for the wild asset swings ahead.
“We expect volatility to remain at higher levels due to seasonality and changes in markets that are no longer perfectly priced,” said Christian Nolting, global chief investment officer at Deutsche Bank. Expectations were reset after the once unstoppable rally in stocks stumbled on a weak jobs report and “good news is now good news and bad news is bad news.”
Corporate Highlights:
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Cisco Systems Inc., the largest maker of computer networking equipment, gave an upbeat revenue forecast for the current period and announced plans to cut thousands of jobs as part of a strategic shift.
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Deere & Co. unexpectedly confirmed its annual profit outlook as the world’s largest tractor maker looked to cut costs in a recessionary agricultural economy.
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Nike Inc. gained after Pershing Square Capital Management LP disclosed a new stake in the world’s largest sportswear company.
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was added to JPMorgan Chase & Co.’s analyst focus list, citing a “compelling entry point.”
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Lenovo Group Ltd. reported better-than-expected quarterly profit, affirming hopes of a gradual recovery in the computing industry driven by global spending on AI.
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Alibaba Group Holding Ltd. reported a disappointing 4% increase in revenue after aggressive promotions failed to boost spending in an anemic Chinese consumer environment.
Main events this week:
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Japan tertiary index, Friday
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US Housing Starts, University of Michigan Consumer Sentiment, Friday
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Fed’s Austan Goolsbee Speaks on Friday
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Housing in Canada begins, Friday
Some of the main movements in the markets:
Actions
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The S&P 500 was up 1.1% at 10:28 a.m. New York time
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The Nasdaq 100 rose 1.8%
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The Dow Jones Industrial Average rose 0.9%
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The Stoxx Europe 600 rose 1.1%
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The MSCI World index rose 0.9%
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The Bloomberg Magnificent 7 Total Return Index rose 2.4%
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The Russell 2000 index rose 1.9%
Coins
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The Bloomberg Dollar Spot Index rose 0.2%
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The euro fell 0.4% to $1.0973
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The British pound rose 0.1% to $1.2845
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The Japanese yen fell 1% to 148.84 per dollar
Cryptocurrencies
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Bitcoin rose 0.4% to $59,418.59
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Ether fell 0.9% to $2,651.52
Titles
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The yield on the 10-year Treasury note rose eight basis points to 3.92%
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Germany’s 10-year yield rose seven basis points to 2.25%
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Britain’s 10-year yield rose eight basis points to 3.91%
Goods
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West Texas Intermediate crude rose 1.1% to $77.81 a barrel
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Spot gold rose 0.1% to $2,450.86 an ounce
This story was produced with help from Bloomberg Automation.
–With assistance from John Viljoen and Richard Henderson.
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