Positive US retail sales data and strong performance from Walmart lifted markets and boosted confidence that the US economy will avoid a recession and achieve a “soft landing”.
The new optimism spurred a rally on Wall Street, with the S&P 500 closing up 1.6%, enough to erase the index’s entire August decline. The tech-heavy Nasdaq Composite Index rose more than 2%.
The Census Bureau said Thursday that retail sales rose 1% in July, the biggest increase in a year and a half and well above economists’ expectations of a 0.3% increase.
Shares in Walmart, the world’s largest retailer, closed up 6.6 percent in New York after the company reported that same-store sales at its flagship U.S. stores rose 4.2 percent from a year earlier and raised its full-year profit outlook.
“So far, we haven’t seen any overall weakening from the consumer,” Walmart Chief Executive Officer Doug McMillon told analysts after the company released quarterly earnings.
The data and comments will come as a relief to investors who were concerned that a weakening job market and negative reports from other consumer-related businesses were signs the U.S. economy was heading for a slowdown.
Last month’s jobs report showed the unemployment rate had risen for a fourth straight year to 4.3%, raising concerns that the Federal Reserve may have waited too long to cut interest rates from their current 23-year highs.
But data released Thursday showed weekly initial jobless claims at 227,000, lower than the consensus forecast and the previous week’s revision, suggesting the labor market remains healthy.
Following the release of the data, U.S. stocks rose and Treasury bonds sold. The Nasdaq Composite Index briefly joined the S&P 500 in intraday trading, erasing its August losses, but ultimately finished up 2.3% on Thursday, leaving the tech-heavy index about five percentage points below its closing price on July 31.
The yield on the policy-sensitive two-year Treasury note rose 0.17 percentage point to nearly 4.12 percent. Yields rise as prices fall.
Mona Mahajan, senior investment strategist at Edward Jones, said Thursday’s retail sales figures “helped ease concerns that the U.S. economy could slide into an imminent recession.”
She added that retail and labor market data “do a great job supporting the soft landing thesis… The consumer may be cooling off, but they’re not collapsing.”
The figures came as the Fed shifted its focus from containing inflation to preserving the health of the labor market as it prepares to begin cutting interest rates at its next meeting in September.
Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee, warned in the Financial Times on Wednesday that “anything is possible” if there are signs of strain in the labor market.
“We see the chaos that’s happening with the labor market collapsing or potentially collapsing. [collapse] “I’m a big supporter of being more proactive to minimize that pain,” he said.
Investors scaled back expectations of a big half-point rate cut in the coming months following Thursday’s retail and labor market data.
The market is currently expecting fewer than four quarter-point cuts this year, up from just over four earlier this week. With only three FOMC meetings remaining until January, a total of four cuts this year would require a half-point cut.
“Yesterday it was 50/50 on whether the Fed would cut rates. [rates by] 25 basis points or 50 basis points [in September]”Right now, I’m 75/25 betting the rate cut will be limited to 25 basis points,” said Mike Zigmont, head of trading research at Harvest Volatility Management.
“We’re not on the brink of a recession like we all feared two weeks ago,” he said.
American consumers are showing signs of spending fatigue after years of inflation that is finally starting to subside. Price pressures have been a boon for Walmart, which has seen an increase in U.S. transaction volume.
The company said that in the second quarter that ended last month, the eponymous grocery and merchandise chain gained U.S. sales share “across all income segments, primarily driven by higher-income households,” attracted by its “value and convenience proposition.”
In the grocery department, Wal-Mart stores captured 21.4% of U.S. sales in the past year, according to market research group Neurutter, outperforming supermarket rivals such as Kroger and Albertsons, which have been merging to compete with Wal-Mart.
U.S. inflation is trending lower, falling back below 3% last month, but price levels for food and consumer goods are still a quarter to a third higher than before the coronavirus pandemic, government data shows.
Walmart is among the retailers that have stepped up discounting to lure shoppers into its stores, seeing a 35% increase in the number of “price drops” on food items in the second quarter and temporarily lowering prices on 7,200 items.
“We are lowering our prices. Walmart US and Sam’s Club US were slightly deflated overall this quarter,” McMillon said. Sam’s Club, Walmart’s membership warehouse chain, saw same-store sales increase 4.6% in the quarter.
Quarterly sales were $169.3 billion, up 4.8% from a year ago and beating expectations of $168.47 billion, also beating Walmart’s previous outlook.
Net income fell 43% to $4.5 billion, a decrease reflecting certain one-time items. Excluding those items, adjusted earnings per share rose nearly 10% to 67 cents, beating expectations.
Additional reporting by Emily Herbert in London
