US stocks rise as hopes for 'soft landing' grow on strong retail sales

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

The renewed optimism led to a rally on Wall Street, with the S&P 500 closing up 1.6% — enough to erase all of the benchmark’s losses in August. The tech-heavy Nasdaq Composite jumped more than 2%.

Retail sales rose 1% in July, the statistics office reported Thursday, the biggest increase in a year and a half and well above economists' expectations for a 0.3% increase.

Shares of Walmart Inc., the world's largest retailer, closed 6.6 percent higher in New York after it reported a 4.2 percent year-over-year increase in same-store sales at its flagship U.S. stores and raised its annual profit forecast.

“So far, we have not seen a weakness in our overall consumption,” Walmart CEO Doug McMillon told analysts after the quarterly results.

The data and comments will come as a relief to investors, who have been concerned that a weak labor market and negative reports from other consumer companies suggest the U.S. economy is headed for a slowdown.

Last month's jobs report, which showed the unemployment rate rose for the fourth straight time to 4.3%, raised concerns that the Federal Reserve has waited too long to cut interest rates from their current 23-year highs.

But data released Thursday showing weekly initial jobless claims came in at 227,000 — below consensus expectations and revised from the previous week — suggests the labor market remains healthy.

U.S. stocks rose and government bonds sold off in the wake of the data. The Nasdaq Composite briefly joined the S&P 500 in intraday trading in erasing its August losses, but its final 2.3% advance on Thursday left the technology-heavy index about five points below its July 31 close.

The yield on policy-sensitive two-year U.S. Treasuries rose 0.17 percentage points to about 4.12%. Yields rise as prices fall.

Mona Mahajan, chief investment strategist at Edward Jones, said Thursday's retail sales figure “helped ease or allay any fears that the U.S. economy is in an imminent recession.”

She added that the retail and labor market data “really helps support the soft landing narrative… The consumer may be in a slowdown, but it’s not in a collapse.”

The figures come as the Federal Reserve shifts its focus from taming inflation to maintaining a healthy labor market as it prepares to start cutting interest rates at its next meeting in September.

Speaking to the Financial Times on Wednesday, Raphael Boucek, president of the Federal Reserve Bank of Atlanta and a voting member of the Federal Open Market Committee, warned that “everything will be on the table” if the labor market shows signs of stress.

“If we see that there is a disruption occurring that suggests that labor markets are going to collapse — or perhaps [collapse] “I strongly support taking more aggressive action to reduce the amount of this pain,” he said.

Investors responded to Thursday's retail and labor market data by reducing their bets on a larger half-percentage-point rate cut in the coming months.

Markets are now pricing in fewer than four quarter-point rate cuts this year, compared with more than four earlier this week. Four rate cuts this year would require a half-point cut, with only three FOMC meetings left before January.

“Yesterday, I was 50/50 on whether the Fed would cut interest rates. [rates by] 25 basis points or 50 basis points [in September]“Today, I’m 75/25 predicting they’ll only cut rates by 25 basis points,” said Mike Zygmunt, head of trading and research at Harvest Volatility Management.

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

American consumers have shown signs of spending fatigue after years of persistent inflation that is now beginning to ease. The price pressures have been good for Walmart, as transactions in the United States are increasing.

The company said that in the second quarter that ended last month, its eponymous grocery and convenience store chain captured market share of sales in the United States “across income groups, driven primarily by higher-income households” attracted by its “value and convenience propositions.”

In the grocery sector, Wal-Mart captured 21.4% of U.S. sales last year, according to market research group Numerator, gaining ground on supermarket rivals Kroger and Albertsons, which have been seeking to merge in part to compete with Wal-Mart.

Inflation in the United States is trending down, falling below 3% last month, but grocery and consumer goods prices are now about a quarter to a third higher than they were before the coronavirus pandemic, according to government data.

Walmart was among retailers that ramped up discounts to lure shoppers into stores. In the second quarter, it offered temporary price cuts on 7,200 items, including a 35% increase in the number of “sales” on food items.

“We’re lowering prices,” McMillon said. “During the quarter, both Walmart U.S. and Sam’s Club U.S. had a slight contraction overall.” Sam’s Club, Walmart’s members-only warehouse chain, saw same-store sales increase 4.6 percent in the quarter.

Quarterly revenue came in at $169.3 billion, beating estimates of $168.47 billion after rising 4.8 percent year over year, faster than Walmart's previous guidance.

Net income fell 43% to $4.5 billion, reflecting some one-time items. Excluding those items, adjusted earnings per share rose about 10% to 67 cents, beating estimates.

Additional reporting by Emily Herbert in London