Global stock markets climbed on Thursday, and Treasury yields surged following unexpectedly robust U.S. retail sales figures, which alleviated concerns about a decelerating economy and prompted investors to retreat from forecasts of immediate, aggressive interest rate reductions. According to the Commerce Department's Census Bureau, retail sales surged by 1.0% last month, significantly outperforming the anticipated 0.3% increase, indicating that consumers continue to spend through bargain hunting.
Some market participants maintained that the strong data does not change the expectation that the Federal Reserve might start reducing rates in September, but it reduces the likelihood of a substantial 50 basis-point cut. Peter Cardillo, chief economist at Spartan Capital Securities in New York, commented, "This alleviates immediate recession fears and is positive for stocks, but might not be favorable for the bond market." He added, "With this report, we're back to square one, with the Fed likely cutting rates by 25 basis points in September. The chances of a more aggressive 50 basis-point cut are diminishing."
Equity markets reacted positively to the latest evidence of economic strength. By 1439 GMT, the S&P 500 rose 1.2%, the Dow Jones Industrial Average gained 0.9%, and the Nasdaq Composite surged 1.9%. MSCI's global share index, which has moved more than 1% on over half of the trading days in August, increased by 0.9%. The benchmark 10-year Treasury yield soared to 3.9245%, and the two-year Treasury yield climbed to 4.0762%, influenced by expectations of a more moderate pace of rate reductions by the Fed.
The rise in Treasury yields provided some relief to the dollar, which strengthened by 0.4% against other major currencies, ending a series of losses that had pushed it to its lowest level against the euro since late 2023. The dollar has also fallen nearly 15% against the Japanese yen since early July. A stronger dollar pressured the euro, which fell 0.35% to $1.09728, while the dollar gained against the yen to 148.9 yen.
In Europe, the pan-European STOXX 600 index rose 1.1%, but some analysts warned against complacency. Nordea's chief market analyst, Jan von Gerich, cautioned that the rapid recovery on Wall Street could lead to further volatility. "The rebound in risk appetite has occurred surprisingly quickly, so I would be cautious," he noted. Wall Street's VIX volatility gauge eased to its lowest level this month, after spiking to a four-year high on August 5.
The Federal Reserve has maintained its main funds rate at 5.25%-5.5% for over a year, aiding in curbing consumer price increases but also intensifying some market imbalances that surfaced this summer. The sustained high U.S. rates that boosted the dollar against the yen came to a halt in July, disrupting a popular speculative trade involving borrowing yen to buy U.S. stocks. The abrupt unwinding of this carry trade caused a market turmoil last week, although many investors believe the currency-related disturbance is nearly over.
In other market developments, sterling increased by 0.15% to $1.2847 following data showing that the UK economy expanded by 0.6% in the second quarter of 2024, meeting economists' expectations. Spot gold prices rose 0.3% to $2,454.21 per ounce, nearing its record high from July 17, as speculation about potential U.S. rate cuts supported the non-yielding metal. Oil markets also strengthened, with Brent crude, the international benchmark, up 1.2% at $80.74 a barrel, buoyed by the positive U.S. retail sales report and its implications for global demand.
