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Strong US retail sales data and robust results from Walmart boosted markets and increased confidence that the US economy will avoid a recession and achieve a “soft landing”.
The renewed optimism sparked a rally on Wall Street, with the S&P 500 closing 1.6 per cent higher — enough to wipe out all the benchmark index’s losses for August. The tech-heavy Nasdaq Composite jumped more than 2 per cent.
Retail sales leapt 1 per cent in July, the Census Bureau reported on Thursday, the most in a year and a half and far above economists’ forecasts for a 0.3 per cent increase.
Shares in Walmart, the world’s largest retailer, closed 6.6 per cent higher in New York after it reported a 4.2 per cent year-on-year increase in same-store sales at its main US stores and raised its annual profit forecast.
“So far, we aren’t experiencing a weaker consumer overall,” Walmart chief executive Doug McMillon told analysts after quarterly results.
The data and comments will come as a relief to investors, who have worried that a weakening jobs market and negative reports from other consumer businesses signal that the US economy is heading for a slowdown.
Last month’s jobs report, which showed a fourth consecutive rise in the unemployment rate to 4.3 per cent, stoked fears that the Federal Reserve has waited too long to lower interest rates from their current 23-year high.
But data published on Thursday showing weekly initial jobless claims at 227,000 — lower than consensus forecasts and the previous week’s revised reading — suggested that the labour market is still healthy.
US stocks rose and government bonds sold off following the data releases. The Nasdaq Composite briefly joined the S&P 500 during intraday trading in wiping out its losses for August, but its ultimate 2.3 per cent advance on Thursday left the tech-heavy index about 5 index points shy of its July 31 close.
The yield on the policy-sensitive two-year Treasury note climbed as much as 0.17 percentage points to almost 4.12 per cent. Yields rise as prices fall.
Mona Mahajan, senior investment strategist at Edward Jones, said Thursday’s retail sales figure had “helped to alleviate or assuage any fears that the US economy is falling into an imminent recession”.
She added that the retail and labour market data “really help support the soft landing narrative . . . The consumer may be cooling, but not collapsing”.
The figures come as the Fed has shifted its focus from taming inflation to preserving the health of the labour market as it prepares to begin cutting rates at its next meeting in September.
Speaking with the Financial Times on Wednesday, Raphael Bostic, president of the Atlanta Fed and a voting member on the Federal Open Market Committee, warned that “everything is on the table” if the labour market shows signs of strain.
“If we see that there is disruption that’s happening that suggests that labour markets are going to collapse — or might [collapse] — I would very much support moving more assertively to minimise the amount of that pain,” he said.
Investors have responded to Thursday’s retail and labour market data by scaling back bets on larger, half-point rate cuts in the coming months.
Markets are now pricing in fewer than four quarter-point interest rate cuts this year, compared with just over four earlier this week. A total of four reductions this year would necessitate a half-point cut since there are just three FOMC meetings remaining 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],” 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, which is what we all feared two weeks ago,” he said.
US consumers have shown signs of spending fatigue after years of persistent inflation that is only now subsiding. The price pressures have been good for Walmart, where transaction numbers are increasing in the US.
The company said that in the second quarter that ended last month, its namesake grocery and merchandise store chain took market share of US sales “across income cohorts primarily driven by upper-income households” attracted by its “value-convenience proposition”.
In groceries, Walmart stores have captured 21.4 per cent of US sales in the past year, according to market research group Numerator, gaining ground on supermarket rivals such as Kroger and Albertsons, which have been pursuing a merger in part to compete with Walmart.
US inflation is moving lower, last month falling back below 3 per cent, but price levels for groceries and consumer goods are between a quarter and a third higher than before the coronavirus pandemic, government data shows.
Walmart has been among retailers boosting discounts to draw shoppers to stores. In the second quarter it offered temporary price cuts on 7,200 items, including a 35 per cent increase in the number of such “rollbacks” for food.
“We’re lowering prices. For the quarter both Walmart US and Sam’s Club US were slightly deflationary overall,” McMillon said. Sam’s Club is Walmart’s member-only warehouse chain, where same-store sales increased 4.6 per cent in the quarter.
Quarterly revenue of $169.3bn topped estimates of $168.47bn after rising 4.8 per cent year on year, faster than Walmart’s previous guidance.
Net income fell 43 per cent to $4.5bn, a drop that reflected certain one-off items. Excluding those items, adjusted earnings per share rose by almost 10 per cent to 67 cents, beating estimates.
Additional reporting by Emily Herbert in London