(Bloomberg) — Stocks rose and bond prices tumbled as data on retail sales and the jobs market underscored the strength of the world’s largest economy and eased fears that the Federal Reserve might risk a deeper economic slowdown.
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As economic jitters eased, stocks extended their recovery from last week’s collapse into a sixth straight session. The S&P 500 rose about 1.5%. Walmart Inc. – a growth barometer – rose on a solid forecast. Treasury yields rose sharply, with the move driven by shorter maturities. Data showed retail sales beat expectations, while unemployment figures hit the lowest since early July. Swap traders further reduced bets on aggressive Fed easing.
“We’re back in an environment where good news is good news and bad news is bad news,” said eToro’s Bret Kenwell. “Investors and consumers want lower inflation – but not at the expense of the economy. Today’s stronger-than-expected retail sales calms some fears that the U.S. could slide into recession.”
The unemployment report was another positive given recent concerns about the labor market. A weak U.S. jobs report earlier this month raised concerns that the Fed had waited too long to cut interest rates. Thursday’s data should buy the Fed some time before its September meeting, Kenwell added.
“What kind of hard landing?” asked Aditya Bhave of Bank of America Corp. “Retail sales for July were consistent with our economic forecast of a soft landing. We maintain our view that the Fed will cut rates only twice this year, by 25 basis points each time, in September and December.”
U.S. officials are trying to curb inflation by raising interest rates without causing the economy to contract – a scenario known as a “soft landing.” Fed Bank of St. Louis President Alberto Musalem said the time for an appropriate rate cut was approaching. His counterpart in Atlanta, Raphael Bostic, told the Financial Times he was “open” to a cut in September.
The S&P 500 crossed the 5,500 mark. The Nasdaq 100 gained 2.4 percent. Cisco Systems Inc. rose on an optimistic forecast. The Russell 2000 of smaller companies rose 2.8 percent. Wall Street’s “fear indicator” – the VIX – fell below 16. That was after it reached 65 last week.
Yields on 10-year US Treasuries rose nine basis points to 3.93%. Traders reduced their bets on a massive Fed rate cut in September, expecting an easing of less than 30 basis points. They now expect a cut of 92 basis points for 2024. The dollar gained.
Retail sales comfortably beat the consensus forecast, but more importantly, they should dispel (at least for now) all the “doom and gloom” that was expressed earlier this month, said Chris Zaccarelli of the Independent Advisor Alliance.
“The entire economic cycle has been puzzling, from much higher inflation than expected to a much more resilient consumer situation than anyone could have predicted in the dark days of 2020,” he noted.
If the economy remains robust – especially in conjunction with declining inflation – the Fed can begin a rate-cutting cycle without the economy falling into recession. And experience shows that this is an extremely positive environment for the stock market, he concluded.
According to TradeStation’s David Russell, investors fearing a possible recession or a deeper downturn have less reason to worry.
“A soft landing is no longer a hope. It’s becoming a reality,” Russell said. “These numbers also suggest that recent market volatility was not really a growth scare. It was just normal summer seasonality, exacerbated by movements in the foreign exchange market.”
The impact of the “weak” US data from early August on the market was “disproportionate” and largely reflected the unwinding of overcrowded positions in some markets, says Jonas Goltermann of Capital Economics.
“We therefore maintain our optimistic forecasts for equity markets and ‘risky’ assets more broadly,” he said.
“Today didn’t bring any major surprises,” said Chris Larkin of E*Trade at Morgan Stanley. “More data like this could ease concerns that the economy is heading for a recession and take pressure off the Fed to cut rates more aggressively than it would like.”
The biggest decline in U.S. stocks since the Covid-19 pandemic is over, and now trend-following quant funds are ready to return to the stock market.
Last month, so-called systematic funds – which buy stocks based on market signals and volatility swings rather than company data – sold the largest volume of stocks in four years, said Scott Rubner of Goldman Sachs Group Inc.
Last week, the VIX volatility index doubled in three trading sessions, a feat that has only been achieved four times before: during the 1987 crash, the 2011 euro crisis, the 2015 Chinese devaluation and Volmageddon in 2018, according to Ed Clissold of Ned Davis Research.
Another way to capture the increase in volatility is the VVIX, which measures the volatility of the VIX.
On August 5, the index reached its highest level since March 2020. While the VVIX fell from such extremely high levels, the S&P 500 recovered sharply in the weeks that followed, Clissold noted. The rally lasted up to a year on average.
“If markets continue to calm down, the VVIX indicator should give a bullish signal in the coming days and confirm that the bull market is intact,” he concluded.
American companies were among the big buyers of stock price declines last week, as U.S. stocks suffered their worst correction since October.
While the S&P 500 posted its fourth consecutive weekly decline, Goldman Sachs Group Inc.’s unit that conducts share buybacks for clients reported record orders, with volume rising to 2.1 times last year’s daily average. BofA’s corporate clients also went on a buying spree, with their share buybacks picking up pace and remaining above seasonal levels for 22 consecutive weeks.
While calm seems to have returned to Wall Street, investors must still prepare for sharp price fluctuations, according to Christian Nolting of Deutsche Bank AG.
“We expect volatility to remain at higher levels due to seasonality and changes in markets that are no longer priced perfectly,” Nolting said. Expectations were reset after the once unstoppable equity rally stalled on a weak jobs report and “the good news is now good news and the bad news is bad news.”
For LPL Financial’s Jeff Roach, the labor market — and what it means for consumer spending — is a key factor in why the Fed is likely to start cutting rates next month, he said. Consumer sentiment is subdued as the labor market cools and the presidential election approaches, overshadowing progress in reining in inflation.
“Investors should expect more volatility in the near future as economic data is likely to send conflicting signals.”
Company highlights:
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Deere & Co. surprisingly reiterated its annual profit forecast as the world’s largest tractor maker sought to cut costs in light of the weakening agricultural economy.
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Nike Inc. rose after Pershing Square Capital Management LP announced a new stake in the world’s largest sportswear company.
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Dell Technologies Inc. was added to JPMorgan Chase & Co.’s analyst focus list based on an “attractive entry point.”
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Johnson & Johnson has twice been blocked in New Jersey from filing for bankruptcy protection for one of its subsidiaries to settle billions of dollars in cancer lawsuits related to the use of baby powder. For its third attempt, the company is now eyeing Texas, where the courts are widely seen as more business-friendly.
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Lenovo Group Ltd. reported better-than-expected quarterly profit, reiterating hopes for a gradual recovery in the computing industry driven by global AI spending.
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Alibaba Group Holding Ltd. reported a disappointing 4% increase in sales after aggressive promotions failed to boost spending in the weak Chinese consumer environment.
Important events this week:
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Japanese Tertiary Index, Friday
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Housing starts in the USA, consumer sentiment from the University of Michigan, Friday
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Fed Chairman Austan Goolsbee speaks on Friday
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Construction starts in Canada, Friday
Some of the key market movements:
Shares
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The S&P 500 rose 1.5% as of 2:00 p.m. New York time.
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The Nasdaq 100 rose 2.4%
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The Dow Jones Industrial Average rose 1.2 percent
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The MSCI World Index rose 1.2 percent
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The Bloomberg Magnificent 7 Total Return Index rose 2.9%
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The Russell 2000 Index rose 2.8%
Currencies
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The Bloomberg Dollar Spot Index rose 0.2%
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The euro fell 0.3 percent to 1.0975 dollars.
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The British pound rose 0.2% to $1.2856.
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The Japanese yen fell 1.2% to 149.07 per dollar
Cryptocurrencies
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Bitcoin fell 0.7% to $58,724.56
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Ether fell 2.9% to $2,599
Bonds
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The yield on 10-year government bonds rose nine basis points to 3.93%
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The yield on German 10-year bonds rose by eight basis points to 2.26 percent
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The yield on British 10-year bonds rose by 10 basis points to 3.92 percent
Raw materials
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West Texas Intermediate crude oil rose 1.3 percent to $78 a barrel
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The spot price of gold rose 0.3 percent to $2,455.31 per ounce.
This story was created with the assistance of Bloomberg Automation.
– With support from John Viljoen and Richard Henderson.
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