Market turmoil fades as data reassures markets, buoy Wall Street indices

Last week's market turmoil appears to have quickly faded, with U.S. economic data this week easing fears of a deep downturn in the world's largest economy. Recession worries have subsided, and investors seem convinced that the Federal Reserve is no longer behind the curve in cutting rates.

Market expectations for a 50-basis-point cut by the Federal Reserve next month have dropped to just 25%, down from 55% a week ago, according to the CME FedWatch tool, following July's U.S. inflation report that tempered expectations for a larger move.  

U.S. consumer prices rose moderately in July and the annual increase in inflation slowed to below 3% for the first time in nearly three and a half years. The CPI rose by 0.2% month-on-month on July — as expected by markets — and gained 2.9% year-on-year, its smallest gain since 2001. The CPI ‘s "core” reading, which excludes volatile food and energy prices, rose by 0.2% month-on-month and 3.2% year-on-year, also largely in line with expectations.

The S&P 500 index ended 1.61% higher, clawing back all of its losses from earlier in August on Thursday — a swift turnaround after the index booked its worst start to a month in eight years. Super Micro Computer (+8.63%), Paramount Global (+7.14%), Cisco Systems (+6.8%) and Lululemon (+6.68%) led the way in Thursday trading. The S&P 500 is up over 16% so far this year and appears geared for a gain of over 4% this week.

Wall Street's other main indexes closed higher on Thursday, with the Nasdaq Composite surging over 2%, driven by July U.S. retail sales data that highlighted resilient consumer spending, easing concerns of an imminent recession in the world's largest economy.

The Nasdaq is on track for a gain of over 5.5% this week and is up 17.21% year-to-date as of the time of writing in premarket hours on Friday.

US retail sales grow by 1% in July, boost S&P 500, Nasdaq

US retail sales increased by 1.0% in July — the most in one and a half years — following a downwardly revised 0.2% decline in June, calming fears of a sharp economic slowdown that had been stoked by last week's rise in the unemployment rate.

A separate reading showed the number of Americans filing new applications for unemployment fell unexpectedly last week. Initial claims for state unemployment benefits dropped 7,000 to a seasonally adjusted 227,000 for the week ended Aug. 10, as per a statement from the US Labor Department said. Economists polled by Reuters had forecast 235,000 claims for the latest week.

The reading suggested an orderly slowdown in the US labor market, all but dashing market expectations for an outsized 50-basis-point interest rate cut by the Federal Reserve next month.

Investors had been jittery following a rise in the unemployment rate to a nearly three-year high of 4.3% in July, sparking fears of an impending recession — concerns that most economists have dismissed.

Walmart stock adds to S&P 500 gains as it raises profit forecast second time this year

Retail giant Walmart added to the S&P 500 gains, seeing its shares jump 6.58% after raising its annual profit forecast for the second time this year, as consumers flocked to its stores for affordable essentials. Competitors Target and Costco also gained, rising by 4.35% and 1.69%, respectively.

Terry Sandven, chief equity strategist at U.S. Bank Wealth Management, commented on the data to Reuters:

"The wall of worry is beginning to crumble as sentiment is improving and the fundamentals support a risk-on bias. Retail sales were above expectations, Consumer Price Index numbers came in at a tolerable level, so the fundamental backdrop is consistent with rising equity prices”.

Nikkei 225 surges by 3%, Japanese stocks headed for best week in 4 years

In Asia, Japan's Nikkei 225 index stood out, surging 3% on Friday and setting the stage for its best week since April 2020 as it attempts to reclaim its record high.  

The Japanese yen, however, has declined nearly 5% from last week's seven-month peak and is now trading near 149 per dollar. Even as it turns cheaper, the yen's volatility is causing global investors to reassess yen-funded trades.

Stock futures indicate a stronger open in Europe and the U.S. on Friday, with UK retail sales data set to be released as London begins its trading day. Expectations are for a rebound in July after a sharper-than-expected decline in June.  

Despite inflation pressures easing, the Bank of England is still expected to ease interest rates at least once more this year as the economic outlook for the remainder of 2024 dims.

While most central banks are moving toward rate cuts, the Reserve Bank of Australia (RBA) appears to be becoming an outlier.  

RBA Governor Michele Bullock stated on Friday that it was premature to consider rate cuts, citing persistently high underlying inflation and potential upside risks to prices. Her comments follow the Reserve Bank of New Zealand’s recent decision to implement its first rate cut in over four years.

Key developments that could influence markets on Friday include UK retail sales for July, the University of Michigan's preliminary U.S. consumer sentiment reading for August, and remarks from the Federal Reserve’s Austan Goolsbee.

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