Strong U.S. retail sales data and solid results from Walmart have boosted markets and increased confidence that the U.S. economy will avoid recession and make a soft landing.
The Census Bureau reported Thursday that retail sales rose 1 percent in July, the fastest pace in a year and a half and well above economists' forecasts of a 0.3 percent gain.
Shares in WalmartThe world's largest retailer rose 6.7 percent in lunchtime trading in New York after the company reported a 4.2 percent year-on-year rise in same-store sales at its core U.S. stores and raised its full-year profit forecast.
“We haven't seen any overall deterioration in consumer demand yet,” Walmart CEO Doug McMillon told analysts after quarterly results.
The data and commentary will come as a relief to investors who are worried that a weakening labor market and negative reports from other consumer companies signal that US economy is heading towards slowdown.
Last month's jobs reportThe unemployment rate, which rose for the fourth straight year to 4.3%, has raised concerns that the Federal Reserve has waited too long to cut rates from their current 23-year high.
However, data released Thursday showing weekly initial jobless claims came in at 227,000, below the consensus forecast and below the previous week's revision, suggesting the labor market remains healthy.
U.S. stocks rose and government bonds sold off after the data. The S&P 500 rose 1.5 percent, out of negative territory for the month, as the benchmark index fully recovered from an early August selloff. The yield on policy-sensitive two-year Treasury notes rose 0.17 percentage point to nearly 4.12 percent. Yields have been rising as prices fall.
Mona Mahajan, senior investment strategist at Edward Jones, said Thursday's retail sales data “helped to allay or dispel any concerns that the U.S. economy is heading toward an imminent recession.”
She added that retail and labor market data “do support the soft landing narrative… The consumer may be cooling off, but they're not losing heart.”
The data comes as the Fed shifts its focus from containing inflation to preserving the health of the labor market as it prepares to begin cutting rates at its next meeting in September.
In an interview with the Financial Times on Wednesday, Raphael Bostic, president of the Atlanta Federal Reserve Bank and a voting member of the Federal Open Market Committee, warned that “everything is at risk” if the labor market shows signs of strain.
“If we see some disruptions that suggest that labor markets are going to collapse or could collapse, [collapse] “I would strongly support more decisive action to minimize this pain,” he said.
Investors responded to Thursday's retail and labor market data by cutting bets on a bigger half-point rate cut in coming months.
Markets are now pricing in fewer than four quarter-point rate cuts this year, down from just over four earlier this week. A total of four cuts this year would require a half-point cut, with only three FOMC meetings remaining before January.
“Yesterday I was 50/50 on whether the Fed would cut rates [rates by] 25 basis points or 50 basis points [in September]”I'm giving them 75/25 odds today that they'll cut rates by just 25 basis points,” said Mike Zigmont, head of trading and research at Harvest Volatility Management.
“We are not on the brink of a recession, which is what we all feared two weeks ago,” he said.
Consumers in the US have showed signs of spending fatigue after years of persistent inflation that is only now easing. The price pressure has been good for Walmart, where the number of transactions in the U.S. is growing.
The company said its namesake grocery and gift store chain gained market share in U.S. sales in the second quarter, which ended last month, “across all income groups, led by upper-income households” attracted by its “value proposition and convenience.”
Walmart stores accounted for 21.4 percent of U.S. sales last year, according to research group Numerator, putting them ahead of supermarket rivals like Kroger and Albertsons, which pursuing the merger partly to compete with Walmart.
US inflation fell last month fall below 3 percentHowever, according to government data, the price level for food and consumer goods is a quarter to a third higher than before the coronavirus pandemic.
Walmart was among retailers that increased discounts to lure shoppers into stores. In the second quarter, it offered temporary price reduction for 7,200 items, including a 35 percent increase in the number of such “kickbacks” for food products.
“We're lowering prices. Walmart US and Sam's Club US overall saw a little bit of deflation this quarter,” McMillon said. Sam's Club is Walmart's member-only warehouse chain, where same-store sales rose 4.6% in the quarter.
Quarterly revenue of $169.3 billion beat the $168.47 billion estimate after growing 4.8% year over year, above Walmart's previous forecast.
Net income fell 43% to $4.5 billion, a drop that reflected some one-time items. Excluding those items, adjusted earnings per share rose nearly 10% to 67 cents, beating estimates.
Additional reporting by Emily Herbert in London