US Recession Worries Vanishing? Nikkei Hits Unseen Highs Since 2020

Asian stocks surged on Friday, bolstered by strong US jobs and spending data that alleviated recession fears, sparking a rally in equities and driving down bond prices.

Japan’s equity benchmarks rose by up to 2.4%, with shares in Australia and South Korea also seeing gains. Chinese stocks showed mixed performance in early trading. US futures ticked higher after the S&P 500 and tech-heavy Nasdaq 100 both advanced, driven by better-than-expected retail sales figures and the lowest jobless claims since early July.

The gains on Wall Street reflected reduced concerns about a potential recession in the US economy. Globally, stocks have mostly recovered the losses incurred last week, following indications that the Federal Reserve might consider cutting interest rates.

"The stronger-than-expected retail sales figures ease some of the concerns that the US might be slipping into a recession," said Bret Kenwell of eToro. "Both investors and consumers are eager for inflation to decrease—but not at the cost of the economy."

In Asia, Treasuries remained stable after Thursday’s sharp decline, which was influenced by expectations of a less aggressive approach from the Federal Reserve. The swaps market now predicts three 25 basis point rate cuts at the Fed’s remaining meetings in 2024, down from four earlier in the week.

Japanese equities were buoyed by a weakening yen, which stabilized at around 149 per dollar on Friday after dropping 1.3% against the US dollar the previous day, marking its lowest level since early August. This currency weakness could attract hedge funds back to the carry trade that recently faltered.

The yen's decline helped boost Japanese stocks, which continued to recover from last week’s volatility, supported by positive economic growth data released on Thursday. The Nikkei 225 index was set for its strongest week since April 2020.

Elsewhere in Asia, China’s central bank governor promised further measures to support the nation’s economic recovery while emphasizing that these actions would not be "drastic."

In Australia, sovereign bond yields rose on Friday, partly following the movement in US Treasuries, as the Reserve Bank of Australia’s governor indicated that the central bank is still some distance from easing monetary policy.

Investors are also keeping an eye on Alibaba Group Holding Ltd., which reported a modest 4% revenue increase as its Chinese commerce segment contracted, and JD.com Inc., which surpassed net profit expectations in its results released late Thursday.

US Market Rally

The S&P 500 continued its six-day rally on Thursday, climbing 6.6%—the best streak since November 2022. The Russell 2000 index of smaller companies outperformed with a 2.5% gain. Wall Street’s “fear gauge,” the VIX, fell to around 15. The recovery of US stocks from last week’s heavy selling suggests that trend-following quant funds may re-enter the market, providing additional support for equities.

Walmart Inc., seen as a key indicator of consumer spending, rose on an optimistic outlook. Applied Materials Inc., the largest US producer of chip-manufacturing equipment, issued a sales forecast that met expectations during late US trading hours.

US policymakers have been attempting to use higher interest rates to control inflation without triggering an economic downturn—a scenario referred to as a “soft landing.” Fed Bank of St. Louis President Alberto Musalem mentioned that the time to consider rate cuts is approaching. His counterpart in Atlanta, Raphael Bostic, told the Financial Times that he is "open" to a reduction in September.

“A soft landing is no longer just a hope. It’s becoming a reality,” said David Russell of TradeStation. “These figures also suggest that the recent market volatility wasn’t a sign of a growth scare; it was simply normal summer seasonality, amplified by movements in the currency market.”

In the commodities market, gold remained steady early Friday at around $2,456 per ounce, while oil prices dipped slightly following Thursday’s gains.