Stocks rally, U.S. recession fears remain in check on latest jobs data

Stocks staged a solid rebound and bonds fell after the latest U.S. labor-market reading helped ease fears about a more pronounced slowdown in the world’s largest economy.

All major groups in the S&P 500 advanced, with the gauge set for its biggest gain since February as data showed U.S. initial jobless claims tumbled the most in nearly a year. As economic angst subsided, Treasuries dropped across the curve – with the selloff driven by shorter maturities. Swap traders further trimmed bets on aggressive Federal Reserve easing in 2024.

Markets have been in a tailspin since last week’s economic data spurred concerns the Fed is waiting too long to cut rates from a two-decade high, jeopardizing prospects for a soft landing. Those jitters combined with stretched positioning, underwhelming tech earnings and poor seasonal trends were among the factors spurring massive volatility around the globe.

“Some good news with jobless claims coming in less than expected,” Chris Zaccarelli at Independent Advisor Alliance said. “It’s hard to believe a recession has already begun. We are exercising caution, but think that the panic that started earlier in the month was overblown.”

The S&P 500 rose roughly 2%. The tech-heavy Nasdaq 100 climbed 2.7%. The Russell 2000 of smaller firms added 1.9%. Nvidia Corp. led gains in tech megacaps. Eli Lilly & Co. soared on a bullish outlook driven by sales of its weight-loss drugs.

Treasury 10-year yields advanced five basis points to 4%. The dollar edged lower.

Initial claims decreased by 17,000 to 233,000 in the week ended Saturday, according to Labor Department data released Thursday.

“I see these claims as some kind of respite in contrast to the stress which hit markets last week with the U.S. job data,” said Alexandre Baradez at IG. Though with “the upward trend on U.S. unemployment intact. This still opens the door to a Fed rate cut in September.”

Any data which suggest that the Fed isn’t behind the curve in regards to its likely rate-cut in September is welcome news for investors, according to Bret Kenwell at eToro.

“Today’s jobless claims data may ease some of the concerns raised by last week’s soft jobs report,” Chris Larkin at ETrade from Morgan Stanley said. “But with inflation data due out next week and the stock market still working through its biggest pullback of the year, it’s unclear how much this will move the sentiment needle.”

While traders in the swaps market have pulled back on their expectations for super-sized rate cuts in the U.S. this year, they are still pricing in about 40 basis points worth of easing for September. Still, they see about 10e basis points of reductions in total for 2024, compared to around 65 basis points just over a week ago.

To Neil Dutta at Renaissance Macro Research, the issue is whether the Fed should be easing soon – and whether a large upfront move is likely or not.

“We are rallying today because of jobless claims!” Dutta said. “That’s unusual. If you get some downside surprises in the data next week, guess what happens? It will just fuel chatter back into the notion that the Fed is a bit behind the curve.”

Treasuries experienced a perfect storm over the past two weeks, with investors likely to remain focused on carry trade unwinds, labor market and growth data, inflation, and geopolitical risks in the weeks to come, according to TD Securities’ Gennadiy Goldberg.

“Markets will remain worried about the risk to a 50 basis-point cut in September and intermeeting cuts, though the pricing for both has receded significantly from recent highs,” he said. “A faster pace of Fed rate cuts also remains a worry, and we expect the Fed to cut rates by 25 basis points at each meeting starting in September until rates reach neutral at 3% by late-2025.”

The recent rout in U.S. stocks flushed some froth out of the market, but positioning and valuations remain at risk if growth continues to decelerate and the Fed “does not show urgency” in easing monetary policy, according to Dubravko Lakos-Bujas at JPMorgan Chase & Co.

“Equities no longer a one-way upside trade, instead increasingly a two-sided debate on growth downside risks, Fed timing, crowded positioning, rich valuation, and rising election and geopolitical uncertainties,” Lakos-Bujas noted.