US stocks rebound as strong retail sales raise hopes of a ‘soft landing’

Strong US retail sales and robust results from Walmart boosted markets and increased confidence that the US economy will avoid a recession and achieve a “soft landing”.

The new optimism sparked a rally on Wall Street. The S&P 500 closed 1.6 percent higher – enough to offset all of the benchmark index’s losses for August. The technology-heavy Nasdaq Composite gained more than 2 percent.

As the Census Bureau announced on Thursday, retail sales rose by 1 percent in July. This is the highest increase in a year and a half and is well above economists’ forecast of an increase of 0.3 percent.

Shares of the world’s largest retailer Walmart closed 6.6 percent higher in New York after the company reported a 4.2 percent year-on-year increase in sales at its major U.S. stores and raised its annual profit forecast.

“So far, we are not seeing any weaker consumer sentiment overall,” Walmart CEO Doug McMillon told analysts after the release of quarterly results.

The data and commentary are likely to come as a relief to investors who had feared that a weakening labor market and negative reports from other consumer goods companies were a sign that the U.S. economy was heading for a slowdown.

Last month’s jobs report, which showed the unemployment rate rising for the fourth consecutive year to 4.3 percent, fueled fears that the Federal Reserve waited too long to cut interest rates from their current 23-year high.

But data released on Thursday, showing weekly initial jobless claims at 227,000 – below consensus forecasts and the previous week’s revised figure – suggest the labor market is still healthy.

Following the data release, U.S. stocks rose and Treasuries were sold off. The Nasdaq Composite briefly caught up with the S&P 500 in intraday trading, erasing its losses for August, but its final 2.3 percent gain on Thursday left the tech-heavy index about 5 index points below its July 31 close.

The yield on the monetary policy two-year US Treasury note rose by as much as 0.17 percentage points to almost 4.12 percent. Yields rise when prices fall.

Mona Mahajan, senior investment strategist at Edward Jones, said Thursday’s retail sales data “helped to allay or dispel any fears that the U.S. economy is on the verge of a recession.”

She added that retail and labor market data “really support the assumption of a soft landing… Consumption may be cooling but not collapsing.”

These figures come as the Fed has shifted its focus from curbing inflation to maintaining a healthy labor market and is preparing to cut interest rates at its next meeting in September.

Raphael Bostic, president of the Atlanta Fed and a voting member of the Federal Open Market Committee, warned in an interview with the Financial Times on Wednesday that “everything is on the table” if the labor market shows signs of tightening.

“If we see disruptions that suggest that labor markets are going to – or could – collapse, I would very much welcome more forceful action to minimize the impact,” he said.

In response to Thursday’s retail and labor market data, investors scaled back their bets on deeper interest rate cuts by half a percentage point in the coming months.

Markets are currently pricing in fewer than four quarter-percentage-point rate cuts this year, compared to just over four earlier this week. A total of four cuts this year would require a half-percentage-point cut, with only three FOMC meetings remaining until January.

“Yesterday I was 50/50 that the Fed would cut rates 25 or 50 basis points (in September),” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Today I’m 75/25 that they’ll only cut 25 basis points.”

“We are not on the verge of a recession as we all feared two weeks ago,” he said.

US consumers are showing signs of spending fatigue after years of sustained inflation that is only now starting to ease. The price pressure is good for Walmart, where the number of transactions in the US is increasing.

The company said the eponymous grocery and retail chain gained market share in sales “across all income groups” in the U.S. in the second quarter ended last month, especially among high-income households attracted by its “low-cost and convenient offering.”

In the grocery sector, Walmart stores accounted for 21.4 percent of U.S. sales last year, according to market research firm Numerator, catching up with supermarket rivals such as Kroger and Albertsons, which are seeking a merger in part to compete with Walmart.

Inflation in the US is falling and fell below the three percent mark again last month. However, the price level for food and consumer goods is a quarter to a third higher than before the coronavirus pandemic, according to government data.

Walmart is among retailers increasing discounts to lure customers into stores. In the second quarter, the company offered temporary price reductions on 7,200 items, including a 35 percent increase in the number of such “marks” on groceries.

“We are lowering prices. Both Walmart US and Sam’s Club US were slightly deflationary overall in the quarter,” said McMillon. Sam’s Club is Walmart’s members-only warehouse chain, whose store sales rose 4.6 percent in the quarter.

Quarterly revenue of $169.3 billion beat estimates of $168.47 billion and rose 4.8 percent year-over-year, faster than Walmart’s previous forecast.

Net income fell 43 percent to $4.5 billion, a decline that was due to one-time items. Excluding those items, adjusted earnings per share rose nearly 10 percent to 67 cents, beating estimates.

Additional reporting by Emily Herbert in London