What’s driving markets?

Stocks climbed sharply Friday as investors digested data showing U.S. retail sales rose by 1% in June, a slightly stronger number than economists had expected.

Although some of the increase was tied to higher prices of gasoline and food, the market appeared encouraged that the all-important consumer hasn’t succumbed to the surge in prices driven by the strongest inflation in four decades.

“Spending is holding up,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, in a phone interview Friday. “Although budgets may be strained, they’re not crumbling.”

Mohannad Aama, a portfolio manager at Beam Capital Management, cautioned that recent bank earnings tell us that still-robust consumer spending is being funded by credit-card debt, which could lead to problems down the road.

Ma said he’s paying close attention to oil prices because “the price that people pay at the pump is going to have an outsize impact” on how long consumer budgets can “stay stretched.” He said oil prices jumping back up to $110 to $120 a barrel could “change the mood very quickly”  in terms of the outlook for spending and inflation.

A survey of consumer sentiment by the University of Michigan showed slight improvement this month. Its sentiment index rose to 51.1 in July, from a June reading of 50, which was the lowest level in decades. The University of Michigan found that consumers’ expectations for inflation over the next year moderated slightly, as did their expectations for price pressures over the next decade — likely a reflection of lower commodity prices.

Meanwhile, U.S. industrial production output fell 0.2% in June, the first decline this year. “It’s part of the mixed bag that we’re seeing” amid concerns the U.S. may be heading for a recession, said Ma.

Citigroup Inc. shares surged more than 14% after the bank reported second-quarter profits that were more robust than analysts had anticipated, even though income had fallen compared to the same quarter last year. Wells Fargo & Co. shares shrugged off a relatively weak earnings report, as a slowdown in its mortgage-lending weighed on revenue while larger provisions for credit losses constricted profits.

The financial sector
SP500.40,
+3.71%
was showing the biggest gains in the S&P 500 index Friday afternoon, jumping 3.9%, according to FactSet data, at last check. The healthcare sector
SP500.35,
+2.10%
had the second biggest rise, up around 2.2%.

Read:Bank of America slashes S&P 500 target to ‘lowest on the Street’ after recession forecast

Investors are also digesting comments from Federal Reserve officials.

St. Louis Fed President James Bullard backed a more aggressive pace of rate hikes this year when he said Friday that he would like to see the fed funds rate rise to a range of 3.75% to 4%, up from his previous year-end target of 3.5%.

Offering a somewhat more dovish take Friday, Atlanta Fed President Raphael Bostic said that moving rates “too dramatically” could undermine the U.S. economy, according to a Reuters report. Investors promptly reduced odds of a 100 basis point rate hike by the Fed later this month following Bostic’s comments, which helped push stocks higher after the open.

“Even with those stronger retail sales numbers, people are expecting the Fed to stay on about the same course as it had been,” said Ma. It’s “most likely” that the central bank will raise its benchmark rate by 75 basis points later this month, after hiking by that same amount in June, he said.

The market is expecting that the Fed will “pivot” if the U.S. heads into a recession, according to Geetu Sharma, founder of AlphasFuture, an asset manager focused on sustainable investing.

“In a way, that ‘Fed put’ is still alive,” she said in a phone interview Friday. “I think for that reason we’re not already seeing a significant breakdown in the market.”

In other economic news, China reported its economy grew just 0.4% annually in the second quarter, as Beijing’s stringent COVID-19 lockdowns have taken a toll on economic activity. Economists polled by The Wall Street Journal expected a rise of 0.9%. The economy contracted 2.6% in the April to June period from the prior quarter, marking the first quarterly contraction since the first quarter of 2020.

Which companies are in focus?

Citigroup Inc.
C,
+14.27%
was the best performing stock on the S&P 500 Friday afternoon with a gain of 14.3% after its earnings report, according to FactSet data. Shares of Wells Fargo & Co.
WFC,
+6.27%
was up 7% after announcing its quarterly results.

Financial stocks were propelling the S&P 500 higher, with Bank of America Corp.
BAC,
+8.00%
up 8%, State Street Corp.
STT,
+10.84%
jumping almost 11% and Bank of New York Mellon
BK,
+7.81%
climbing 7.9%.

UnitedHealth Group
UNH,
+4.81%
shares rallied 4.8% after the company’s profits exceeded $5 billion during the second quarter.

Pinterest Inc.
PINS,
+15.80%
shares surged more than 16% on reports that Elliott Management, a large activist investor, had taken a stake in the social-media player.

How are other assets faring?

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.932%
was down 3 basis points at 2.93%. Bond yields and prices move in opposite directions.

The ICE U.S. Dollar Index
DXY,
-0.42%,
a gauge of the dollar’s strength against a basket of rivals, was down 0.5%.

In oil futures
CL.1,
+2.16%,
West Texas Intermediate crude for August delivery
CLQ22,
+2.16%
rose 1.9% to settle at $95.78 a barrel. For the week, oil prices fell 6.9%.

Gold for August delivery
GCQ22,
-0.20%
slipped 0.1% Friday to settle at $1,703.60 an ounce, bringing the yellow metal’s weekly loss to 2.2%.

Bitcoin was trading up 1.8% at $20,031.

In European equities, the STOXX Europe 600 Index
SXXP,
+1.79%
closed 1.8% higher Friday, paring its weekly decline to 0.8%. The UK’s FTSE 100 Index
UKX,
+1.69%
closed up 1.7% Friday but still fell 0.5% for the week.

In Asia, the Shanghai Composite Index
SHCOMP,
-1.64%
fell 1.6% Friday, booking a weekly loss of 3.8%. Hong Kong’s Hang Seng Index
HSI00,
-0.53%
shed 2.2% Friday and dropped 6.6% for the week. Japan’s Nikkei 225
NIK,
+0.54%
benchmark ended 0.5% higher Friday for a weekly gain of 1%.

—Barbara Kollmeyer contributed to this report.