Strong U.S. retail sales data and strong results from Walmart lifted markets and boosted hopes that the U.S. economy will avoid recession and achieve a “soft landing.”
The renewed optimism sparked a rally on Wall Street, with the S&P 500 ending 1.6 percent higher — enough to erase all major index losses for the month of August. The tech-heavy Nasdaq Composite rose more than 2 percent.
The Census Bureau said Thursday that retail sales rose 1 percent in July, the most in a year and a half and beating economists’ forecasts for a 0.3 percent increase.
Shares of the world’s biggest retailer Walmart rose 6.6 percent in New York after a 4.2 percent year-over-year increase in same-store sales at its main U.S. stores and a boost to its annual profit forecast.
“So far, we haven’t experienced weaker consumers overall,” Walmart Chief Executive Doug McMillan told analysts after quarterly results.
The data and comments should be a relief to investors who worried that a weak jobs market and negative reports from other consumer businesses signaled the U.S. economy is headed for recession.
Last month’s jobs report showed a fourth consecutive rise in the unemployment rate to 4.3 percent, fueling fears that the Federal Reserve is waiting too long to cut interest rates from their current 23-year high.
But data released on Thursday showing weekly jobless claims at 227,000 — below consensus estimates and the previous week’s revised reading — suggested the labor market was still healthy.
US stocks rose and government bonds sold off following the data releases. The Nasdaq Composite briefly joined the S&P 500 in erasing its losses for the month of August, but its final 2.3 percent gain on Thursday was about 5 index points shy of its July 31 close.
The yield on the policy-sensitive two-year Treasury note rose 0.17 percentage points to nearly 4.12 percent. As prices fall, yields rise.
Mona Mahajan, senior investment strategist at Edward Jones, said Thursday’s retail sales figure “helped to allay or alleviate fears that the U.S. economy is slipping into an imminent recession.”
Retail and labor market data “really help support the soft landing story . . . consumers may be cooling, but not collapsing”.
The figures come as the central bank shifted its focus from controlling inflation to protecting the health of the labor market, as it begins to cut rates at its next meeting in September.
Speaking to the Financial Times on Wednesday, Atlanta Fed President Raphael Bostick, a voting member of the Federal Open Market Committee, warned that “everything is on the table” if the labor market shows signs of a crisis.
“If we see disruptions happening that suggest labor markets are going to — or might — fall [collapse] “I would very much support moving more decisively to reduce that level of pain,” he said.
Investors responded to Thursday’s retail and labor market data, re-gauging bets for big, half-point rate cuts in the coming months.
Markets are now pricing in less than four quarter-point interest rate cuts, compared with four earlier this week. A total of four cuts this year would require a half-point cut because there are only three FOMC meetings before January.
“Yesterday, I was 50/50 on whether the Fed was going to cut [rates by] 25 basis points or 50 basis points [in September]”I’m 75/25 today that they’ll only cut 25 basis points,” said Mike Zygmond, head of trading and research at Harvest Volatility Management.
“We’re not on the brink of recession, which is what we all feared two weeks ago,” he said.
US consumers have shown signs of spending fatigue after years of sustained inflation that has only just eased. Pricing pressures bode well for Walmart, whose transaction numbers are rising in the US.
In the second quarter ended last month, the company said its namesake grocery and consignment store chain gained market share in U.S. sales “driven primarily by high-income households” driven by a “value-convenience proposition.”
In groceries, Walmart stores captured 21.4 percent of U.S. sales last year, according to market research group Numerator, as they continue to converge on supermarket rivals Kroger and Albertsons to compete with Walmart.
U.S. inflation is moving lower, falling below 3 percent last month, but price levels for groceries and consumer goods are a quarter and a third higher than they were before the coronavirus pandemic, government data showed.
Walmart will increase discounts among retailers to draw shoppers to stores. In the second quarter it granted temporary price cuts to 7,200 items, including a 35 percent increase in the number of such “rollbacks” for food products.
“We’re lowering prices. Both Walmart US and Sam’s Club US were slightly deflationary in the quarter,” said McMillan. Sam’s Club, Walmart’s members-only warehouse chain, had same-store sales up 4.6 percent in the quarter.
Quarterly revenue of $169.3bn topped estimates of $168.47bn, up 4.8 per cent year-on-year, faster than Walmart’s previous guidance.
Net income fell 43 percent to $4.5 billion, reflecting certain items. Excluding those items, adjusted earnings per share rose nearly 10 percent to 67 cents.
Additional reporting by Emily Herbert in London