Stocks climbed and bonds tumbled as data on retail spending and the labour market underscored the strength of the world's largest economy, allaying fears the US Federal Reserve (Fed) would be risking a deeper slowdown.

As economic jitters abated, the S&P 500 extended a six-day rally to 6.6% — the best performance in such a span since November 2022. Walmart Inc — a barometer of growth — jumped on a solid outlook. Treasury yields surged, with the move led by shorter maturities. Data showed retail sales beat estimates while jobless claims hit the lowest since early July. Swap traders further reduced bets on aggressive Fed easing.

"We're back to an environment where good news is good news and bad news is bad news," said Bret Kenwell at eToro. "Investors and consumers want inflation to go lower — but not at the expense of the economy. Today's stronger-than-expected retail sales figure quiets some of the fears the US may be slipping into a recession."

Given the recent worries about the labor market, the unemployment claims report was another positive. A weak US payrolls print earlier this month spurred concern the Fed has waited too long to cut rates. Thursday's data should buy officials some time until the September meeting, Kenwell added.

"What hard landing?" said Aditya Bhave at Bank of America Corp. "The July retail sales data were consistent with our soft-landing economic outlook. We remain comfortable with our view that the Fed will cut rates only twice this year, by 25 basis points each, in September and December."

US officials have been trying to use higher rates to ease inflation without causing the economy to contract — a scenario known as a "soft landing." Fed Bank of St. Louis President Alberto Musalem said the time is approaching when it will be appropriate to cut rates. His Atlanta counterpart Raphael Bostic told the Financial Times he's "open" to a reduction in September.

The S&P 500 climbed 1.6%. The Nasdaq 100 added 2.5%. The Russell 2000 of smaller firms climbed 2.5%. Wall Street's "fear gauge" – the VIX – dropped to around 15. In late hours, Applied Materials Inc., the largest US maker of chip-manufacturing equipment, gave a sales forecast that met estimates.

Treasury 10-year yields rose eight basis points to 3.91%. Traders trimmed bets on a jumbo September Fed cut, and they now see less than 100 basis points of cuts for 2024. The dollar gained.

"Hard, soft, bumpy? The market goes 'to the mattresses'," said Steve Sosnick at Interactive Brokers, referring to a line from the movie "The Godfather," which means adopting a warlike stance. "All this discussion about whether our landing is hard or soft, combined with my wife and I needing a new mattress, has caused me to conflate the economy with bedding."

"And in both cases, it really doesn't matter," Sosnick said. "If you're tired enough, you'll fall asleep anywhere. If you're in a FOMO (Fear of Missing Out) and momentum-driven rally mode, you'll buy stocks regardless of the reason. Today's economic reports make the chances for aggressive rate-cutting more remote, but that doesn't matter today."

The retail sales numbers were a blowout versus consensus, but more importantly it should lay to rest (at least for the moment) all of the "doom and gloom" that was expressed at the beginning of this month, according to Chris Zaccarelli at Independent Advisor Alliance.

"This entire economic cycle has been a headscratcher from much higher-than-expected inflation to a much more resilient consumer than anyone could have forecast back in the dark days of 2020," he noted.

If the economy continues to be resilient – especially in conjunction with slowing inflation – then the Fed can begin a rate-cutting cycle without the economy entering recession and history shows this is an extremely positive environment for the stock market, he concluded.

To David Russell at TradeStation, investors fearing a potential recession or sharper slowdown have less to worry about.

"A soft landing is no longer a hope. It's becoming a reality," Russell said. "These numbers also suggest that recent market volatility wasn't really a growth scare. It was just normal summer seasonality amplified by moves in the currency market."

The market fallout from the "weak" early August US data was "disproportionate" and largely reflected the unwind of crowded positions in some markets, according to Jonas Goltermann at Capital Economics.

"As such, we are sticking to our optimistic forecasts for equity markets and "risky" assets more broadly," he said.

At Ned Davis Research, Ed Clissold said that if markets continue to calm down, one indicator should give a bullish signal in the coming days, confirming that the bull market is intact.

One way to capture the volatility surge of earlier this month is through the VVIX — which measures the volatility of the VIX.

On Aug. 5, the gauge hit its highest level since March 2020. When the VVIX has fallen from such extremely high levels, the S&P 500 has rebounded sharply over the next few weeks, Clissold noted. The rally has continued for up to a year later, on average.

While calm has seemingly been restored to Wall Street, Deutsche Bank AG's Christian Nolting says investors still need to gird against wild asset swings to come.

"We expect volatility to stay at higher levels due to seasonality and change in markets which are no longer priced to perfection," said Nolting. Expectations have been reset after the once unstoppable equities rally stumbled on a weak jobs report and the "good news is now good news and bad news is bad news."

To Jeff Roach at LPL Financial, the jobs market — and what it means for consumer spending — is a key factor in why the Fed is expected to start cutting interest rates next month, he said. Measures of consumer sentiment have been subdued as the labor market cools and the presidential election nears, overshadowing progress in taming inflation.

"Investors should expect more volatility in the near term as the economic data likely give conflicting signals." — Bloomberg