Stocks rose as data signaled the world’s largest economy remains strong despite the Federal Reserve’s aggressive tightening campaign, bolstering the case for a so-called soft landing.
(Bloomberg) — Stocks rose as data signaled the world’s largest economy remains strong despite the Federal Reserve’s aggressive tightening campaign, bolstering the case for a so-called soft landing.
Major equity benchmarks gained as a report showed gross domestic product unexpectedly picked up steam in the second quarter, while US pending home sales unexpectedly climbed in June. On Wednesday, Fed Chair Jerome Powell said his staff had ditched the recession forecast it put in place in March, when banking turmoil had raised fears about a potential credit crunch.
“How much longer can Wall Street economists keep prophesying an imminent US recession when economic growth remains so resilient to higher interest rates?,” said Hugh Grieves, fund manager of the Premier Miton US Opportunities Fund. “It appears that the Fed is on the verge of pulling off the mythical ‘soft landing’ scenario of low unemployment and low inflation.”
The Nasdaq 100 climbed about 1% as a bullish forecast from Meta Platforms Inc. spurred a 7% rally in the shares. Traders will be watching results from Intel Corp. later Thursday. The S&P 500 was set for its highest since March 2022 while the Dow Jones Industrial Average fluctuated. If the blue-chip gauge closes higher for a 14th straight day, it will be a record winning run. A measure of big banks rose even after US regulators unveiled plans for a 19% boost in capital requirements for the eight largest financial institutions.
Two-year US yields, which are more sensitive to imminent Fed moves, increased seven basis points to around 4.9%. The dollar halted a two-day decline. West Texas Intermediate oil hovered near $80 a barrel. European stocks held onto gains and the euro retreated after the region’s central bank raised rates and kept options open for the next meeting.
Soft Landing or Recession
To Mike Loewengart at Morgan Stanley Global Investment Office, Thursday’s reports all pointed to a buoyant economy that continues to cruise despite interest rates reaching their highest levels in more than two decades.
“The Fed has been hesitant to close the door on additional rate hikes, and if today’s strong data is any indication, it may have to wait a while longer before it’s comfortable signaling this tightening cycle has run its course,” Loewengart added. “For now, the indicators are still pointing toward a relatively soft economic landing.”
Earlier this week, the International Monetary Fund raised its outlook for the world economy, estimating that risks have eased in recent months after the US averted a default and authorities staved off a banking crisis on both sides of the Atlantic. The fund is among a growing number of voices that see a potential American soft landing.
Economists in a Bloomberg survey this month boosted estimates for GDP growth in the second and third quarters, although they still say there’s a 60% chance the US will fall into recession in the next 12 months. Meantime, investors are still split: 58% of respondents in JPMorgan Chase’s weekly survey expect a soft landing, while 42% are bracing for a recession.
Michelle Cluver, portfolio strategist at Global X ETFs, said despite the growing sentiment the US may avoid a recession, the resilience of the consumer and the economy keeps the focus on the Fed and its September meeting.
To Richard Flynn at Charles Schwab, while the solid US GDP is a positive sign of a strengthening economy, high demand will also reinforce the inflationary pressures that are an “ongoing concern” for policymakers.
“As long as the labor market remains tight and inflation remains above the central bank’s 2% target, we can expect to see further rate increases in coming months,” Flynn noted. “The market eagerly awaits the end of the rate hiking cycle, but may be reassured to see that policy has not yet pushed the economy closer to recession as some investors fear.”
Corporate Highlights:
- Royal Caribbean Cruises Ltd. advanced after raising its full year profit forecast to a level that significantly beat expectations.
- McDonald’s Corp. rose as sales and profit surpassed analysts’ projections, but the company warned of slower growth later this year amid a challenging economic backdrop.
- Lam Research Corp. climbed after the semiconductor equipment maker gave a strong revenue forecast for its first quarter, prompting analysts to raise their price targets on the stock.
- Comcast Corp. gained after reporting profit that topped analysts’ estimates in the second quarter, even as internet and TV subscribers vanished.
- EBay Inc. dropped after projecting earnings in the current quarter that narrowly missed analysts’ estimates, suggesting the e-commerce company is struggling to perform with a shrinking customer base.
- Southwest Airlines Co. fell after warning of higher-than-expected costs, pressuring the carrier’s earnings and countering gains from a surge in early-summer travel.
- Chipotle Mexican Grill Inc. dropped after sales fell short of Wall Street’s expectations and its outlook disappointed investors.
- Bristol-Myers Squibb Co. retreated after its four biggest drugs missed expectations, leading the company to forecast a decline in sales for the year.
Key events this week:
- Japan Tokyo CPI, Friday
- BOJ rate decision, Friday
- Eurozone economic confidence, consumer confidence, Friday
- US consumer income, employment cost index, University of Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.5% as of 11:26 a.m. New York time
- The Nasdaq 100 rose 1.3%
- The Dow Jones Industrial Average was little changed
- The Stoxx Europe 600 rose 1.4%
- The MSCI World index rose 0.5%
Currencies
- The Bloomberg Dollar Spot Index rose 0.5%
- The euro fell 0.8% to $1.0992
- The British pound fell 0.6% to $1.2859
- The Japanese yen fell 0.6% to 141.08 per dollar
Cryptocurrencies
- Bitcoin fell 1% to $29,306.58
- Ether fell 0.7% to $1,868.42
Bonds
- The yield on 10-year Treasuries advanced seven basis points to 3.94%
- Germany’s 10-year yield declined two basis points to 2.47%
- Britain’s 10-year yield advanced two basis points to 4.30%
Commodities
- West Texas Intermediate crude rose 1.5% to $79.99 a barrel
- Gold futures fell 1.3% to $1,983.70 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Brett Miller, Tassia Sipahutar, Sujata Rao and Isabelle Lee.
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