Stocks Rally as Data Show US Economy Is Holding Up: Markets Wrap

(Bloomberg) — Stocks climbed and bonds tumbled as data on retail spending and the labor market underscored the strength of the world’s largest economy, allaying fears the Federal Reserve would be risking a deeper slowdown.

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As economic jitters abated, equities extended a rebound from last week’s meltdown into a sixth straight session. The S&P 500 rose about 1.5%. Walmart Inc. — a barometer of growth — jumped on a solid outlook. Treasury yields surged, with the move led by shorter maturities. Data showed retail sales beat estimates while jobless claims hit the lowest since early July. Swap traders further reduced bets on aggressive Fed easing.

“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 worries about the labor market, the jobless claims data was another positive. After a weak payrolls report, there was fear the Fed waited too long to cut rates. The report should buy officials some time until the September meeting, Kenwell added.

“What hard landing?” said Aditya Bhave at Bank of America Corp. “The July retail sales data were consistent with our soft-landing economic outlook. We remain comfortable with our view that the Fed will cut rates only twice this year, by 25 basis points each, in September and December.”

US officials have been trying to use higher rates to ease inflation without causing the economy to contract — a scenario known as a “soft landing.” Fed Bank of St. Louis President Alberto Musalem said the time is approaching when it will be appropriate to cut rates. His Atlanta counterpart Raphael Bostic told the Financial Times he’s “open” to a reduction in September.

The S&P 500 topped 5,500. The Nasdaq 100 added 2.1%. Cisco Systems Inc. jumped on a bullish forecast. The Russell 2000 of smaller firms climbed 2.7%. Wall Street’s “fear gauge” – the VIX – dropped below 16. That’s after hitting 65 last week.

Treasury 10-year yields rose 10 basis points to 3.93%. Traders trimmed bets on a jumbo September Fed cut, pricing in less than 30 basis points of easing. They now see 92 basis points of cuts for 2024. The dollar advanced.

“Don’t bet against the American consumer,” according to Capital Economics. “There was almost nothing in the July retail sales report for the ‘perma bears’ to latch on to.”

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.

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.”

The market fallout from the “weak” early August US data was “disproportionate” and largely reflected the unwind of crowded positions in some markets, according to Jonas Goltermann at Capital Economics.

“As such, we are sticking to our optimistic forecasts for equity markets and “risky” assets more broadly,” he said.

“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.”

The US economy overall has, thus far, been robust enough to take an extended Fed rate pause, according to Don Rissmiller at Strategas.

“Small cracks in the economy mean there’s a clear case for Fed rate cuts soon,” he said. “But there’s no emergency that would justify a jumbo rate cut in today’s US economic data.”

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.

“Today’s retail sales data and jobless claims offer yet more evidence that recession risk remains low in the US even as the economy decelerates from unsustainably strong growth levels,” said Ronald Temple at Lazard. “The case for the Fed to ease by 25 basis points is rock solid. There is little evidence to suggest a need for a 50 basis-point reduction.”

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.

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, he said. 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.”

Last week, the VIX doubled in three trading sessions, a feat accomplished only four times previously: 1987 crash, 2011 euro crisis, 2015 China devaluation, and 2018 Volmageddon, according to Ed Clissold at Ned Davis Research.

Another way to capture the volatility surge is through the VVIX — which measures the volatility of the VIX.

On Aug. 5, the gauge hit its highest level since March 2020. When the VVIX has fallen from such extremely high levels, the S&P 500 has rebounded sharply over the next few weeks, Clissold noted. The rally has continued for up to a year later, on average.

“If the markets continue to calm down, the VVIX indicator should give a bullish signal in the coming days, confirming that the bull market is intact,” he concluded.

Corporate Highlights:

Deere & Co. unexpectedly affirmed its annual profit outlook as the world’s top tractor maker sought to cut costs in a slumping farm economy.
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.”
Johnson & Johnson was twice blocked in New Jersey from getting bankruptcy protection from one of its units to resolve billions of dollars in cancer claims tied to baby powder use. For its third try, the company is eyeing Texas, home to what are widely considered more business-friendly courts.
Lenovo Group Ltd. reported better-than-expected quarterly profit, affirming hopes for a gradual computing industry recovery driven by global AI spending.
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 1.4% as of 1 p.m. New York time
The Nasdaq 100 rose 2.1%
The Dow Jones Industrial Average rose 1.2%
The MSCI World Index rose 1.1%
Bloomberg Magnificent 7 Total Return Index rose 2.6%
The Russell 2000 Index rose 2.7%

Currencies

The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.3% to $1.0978
The British pound rose 0.2% to $1.2852
The Japanese yen fell 1.2% to 149.04 per dollar

Cryptocurrencies

Bitcoin rose 0.6% to $59,536.17
Ether fell 0.7% to $2,658.15

Bonds

The yield on 10-year Treasuries advanced 10 basis points to 3.93%
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 1.8% to $78.38 a barrel
Spot gold rose 0.3% to $2,455.82 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from John Viljoen and Richard Henderson.