(Bloomberg) — Stocks rose and bond prices tumbled as data on retail sales and the jobs market underscored the strength of the world’s largest economy and eased fears that the Federal Reserve might risk a deeper economic slowdown.

Most read by Bloomberg

As economic jitters eased, the S&P 500 extended its six-day rally to 6.6% – the best performance in such a period since November 2022. Walmart Inc. – a growth barometer – rose on a solid forecast. Treasury yields jumped, with the move driven by shorter maturities. Data showed retail sales beat estimates, while unemployment figures hit the lowest since early July. Swap traders further reduced bets on aggressive Fed easing.

“We’re back in an environment where good news is good news and bad news is bad news,” said eToro’s Bret Kenwell. “Investors and consumers want lower inflation – but not at the expense of the economy. Today’s stronger-than-expected retail sales calms some fears that the U.S. could slide into recession.”

The unemployment report was another positive given recent concerns about the labor market. A weak U.S. jobs report earlier this month raised concerns that the Fed had waited too long to cut interest rates. Thursday’s data should buy the Fed some time before its September meeting, Kenwell added.

“What kind of hard landing?” asked Aditya Bhave of Bank of America Corp. “Retail sales for July were consistent with our economic forecast of a soft landing. We maintain our view that the Fed will cut rates only twice this year, by 25 basis points each time, in September and December.”

U.S. officials are trying to curb inflation by raising interest rates without causing the economy to contract – a scenario known as a “soft landing.” Fed Bank of St. Louis President Alberto Musalem said the time for an appropriate rate cut was approaching. His counterpart in Atlanta, Raphael Bostic, told the Financial Times he was “open” to a cut in September.

The S&P 500 rose 1.6 percent. The Nasdaq 100 gained 2.5 percent. The Russell 2000 of smaller companies rose 2.5 percent. Wall Street’s “fear indicator,” the VIX, fell to around 15. In late trading, Applied Materials Inc., the largest U.S. maker of chip production equipment, issued a sales forecast that was in line with estimates.

Yields on 10-year US Treasuries rose eight basis points to 3.91%. Traders reduced their bets on a massive Fed rate cut in September and now expect rate cuts of less than 100 basis points in 2024. The dollar gained.

The story continues

“Hard, soft, bumpy? The market is going ‘to the mattresses,'” said Steve Sosnick of Interactive Brokers, referring to a line from the movie “The Godfather” that means to take a warlike stance. “All this discussion about whether our landing is hard or soft, combined with the fact that my wife and I need a new mattress, has me confusing the economy with bedding.”

“And in either case, it really doesn’t matter,” Sosnick said. “If you’re tired enough, you’ll fall asleep anywhere. If you’re in FOMO (fear of missing out) mode and momentum rally mode, you’re going to buy stocks no matter what the reason. Today’s economic reports make the chances of aggressive rate cuts seem less likely, but that doesn’t matter today.”

Retail sales comfortably beat the consensus forecast, but more importantly, they should (at least for now) put to rest all the “doom and gloom” scenarios that were being voiced earlier this month, said Chris Zaccarelli of Independent Advisor Alliance.

“The entire economic cycle has been puzzling, from much higher inflation than expected to a much more resilient consumer situation than anyone could have predicted in the dark days of 2020,” he noted.

If the economy remains robust – especially in conjunction with declining inflation – the Fed can begin a rate-cutting cycle without the economy falling into recession. And experience shows that this is an extremely positive environment for the stock market, he concluded.

According to TradeStation’s David Russell, investors fearing a possible recession or a deeper downturn have less reason to worry.

“A soft landing is no longer a hope. It’s becoming a reality,” Russell said. “These numbers also suggest that recent market volatility was not really a growth scare. It was just normal summer seasonality, exacerbated by movements in the foreign exchange market.”

The impact of the “weak” US data from early August on the market was “disproportionate” and largely reflected the unwinding of overcrowded positions in some markets, says Jonas Goltermann of Capital Economics.

“We therefore maintain our optimistic forecasts for equity markets and ‘risky’ assets more broadly,” he said.

Ed Clissold of Ned Davis Research said that if markets continue to calm down, an indicator could send a bullish signal in the coming days, confirming that the bull market is intact.

One way to capture the increase in volatility from the beginning of the month is the VVIX, which measures the volatility of the VIX.

On August 5, the index reached its highest level since March 2020. While the VVIX fell from such extremely high levels, the S&P 500 recovered sharply in the weeks that followed, Clissold noted. The rally lasted up to a year on average.

While calm seems to have returned to Wall Street, investors must still prepare for sharp price fluctuations, according to Christian Nolting of Deutsche Bank AG.

“We expect volatility to remain at higher levels due to seasonality and changes in markets that are no longer priced perfectly,” Nolting said. Expectations were reset after the once unstoppable equity rally stalled on a weak jobs report and “the good news is now good news and the bad news is bad news.”

For LPL Financial’s Jeff Roach, the labor market — and what it means for consumer spending — is a key factor in why the Fed is likely to start cutting rates next month, he said. Consumer sentiment is subdued as the labor market cools and the presidential election approaches, overshadowing progress in reining in inflation.

“Investors should expect more volatility in the near future as economic data is likely to send conflicting signals.”

Company highlights:

• Autodesk Inc. continued to pursue a controversial divestment strategy despite promising investors it would stop, ignoring internal warnings about the risks involved, according to previously unpublished internal documents.

• Deere & Co., the world’s largest tractor maker, reported better-than-expected results and reiterated its profit outlook as cost-cutting measures help the company weather the weakening agricultural economy.

• Nike Inc. shares rose sharply after Pershing Square Capital Management LP announced a new stake in the world’s largest sportswear company.

• Seagram Co. heir Edgar Bronfman Jr. is close to making a bid for Paramount Global, setting off a potential bidding war for the film and television company that owns CBS and MTV.

• Dell Technologies Inc. was brought into focus by analysts at JPMorgan Chase & Co. because of an “attractive entry point.”

• Johnson & Johnson has twice been blocked in New Jersey from filing for bankruptcy protection for one of its subsidiaries to settle billions of dollars in cancer lawsuits related to the use of baby powder. For its third attempt, the company is now eyeing Texas, where the courts are widely seen as more business-friendly.

• Scott Kirby, chief executive of United Airlines Holdings Inc. and one of Boeing’s biggest customers and biggest critics, said the plane maker is “on the right track” under new CEO Kelly Ortberg and will recover from a series of safety failures faster than expected.

Important events this week:

• Japanese Tertiary Index, Friday

• Housing starts in the USA, consumer sentiment from the University of Michigan, Friday

• Fed Chairman Austan Goolsbee speaks on Friday

• Construction starts in Canada, Friday

Some of the key market movements:

Shares

• The S&P 500 rose 1.6% as of 4:00 p.m. New York time.

• The Nasdaq 100 rose 2.5%

• The Dow Jones Industrial Average rose 1.4 percent

• The MSCI World Index rose 1.3 percent

• The Bloomberg Magnificent 7 Total Return Index rose 2.9%

• The Russell 2000 Index rose 2.5%

Currencies

• The Bloomberg Dollar Spot Index rose 0.2%

• The euro fell 0.4% to 1.0973 USD

• The British pound rose 0.2% to $1.2855.

• The Japanese yen fell 1.2% to 149.04 per dollar

Cryptocurrencies

• Bitcoin fell 3.5% to $57,066.81

• Ether fell 4.7% to $2,549.8.

Bonds

• The yield on 10-year government bonds rose eight basis points to 3.91%.

• The yield on German 10-year bonds rose by eight basis points to 2.26 percent

• The yield on British 10-year bonds rose by 10 basis points to 3.92 percent

Raw materials

• West Texas Intermediate crude oil rose 1.2 percent to $77.94 a barrel

• The spot price of gold rose 0.3 percent to $2,455.50 per ounce.

This story was created with the assistance of Bloomberg Automation.

– With support from John Viljoen and Richard Henderson.

Most read by Bloomberg Businessweek

©2024 Bloomberg L.P.