Wall Street seesawed from red to black and back on Thursday as recessionary fears and simmering U.S.-China trade tensions offset upbeat retail sales data. All three major domestic equity indexes struggled for direction given strong retail sales and falling Treasury yields.

The S&P 500 and the Dow Jones Industrial Average gained ground in a late rally on Thursday as upbeat retail sales data offset recessionary fears amid the simmering U.S.-China trade tensions. The Nasdaq closed lower, weighed by a plunge in the shares of Cisco Systems Inc.

Walmart exceeded second-quarter analyst estimates and raised its full-year earnings outlook, sending the company’s up 6.1% and soothing concerns about waning consumer demand.

Those concerns were further eased when retail sales data surpassed analyst expectations. Consumers, who account for about 70% of the economy, stepped up their spending across the board in July, according to the Commerce Department.

Other economic data was less sanguine. Manufacturing output shrank more than expected in July, according to the Fed, and new claims for unemployment benefits came in above forecasts.

Belligerent rhetoric kept U.S.-China trade tensions at a low boil, as China vowed it would counter the last round of tariffs on Chinese imports and called on the United States to meet it halfway, while Trump said any deal must be made “on our terms.”

The prolonged escalation of the trade war between the world’s two largest economies and the economic fallout have vexed global markets for months and have begun to drag on some companies’ top lines.

Impending U.S. tariffs weighed on Cisco Systems, which fell 8.6% after reporting a 25% decline in Chinese sales and set sales and revenue forecasts well below estimates.

Trade tensions also sent the U.S. 30-year Treasury yield to a record low and the benchmark 10-year yield to a three-year trough.

Of the 11 major sectors of the S&P 500, six closed the day in positive territory, with consumer staples enjoying the largest percentage gain.

Shares of JC Penney rose 2.2% after the retailer posted a smaller quarterly loss than analysts estimated.

GE fell11.3% on the heels of a report from whistleblower Harry Markopolos accusing the conglomerate of hiding $38.1 billion in potential losses and claiming its cash situation was far worse than disclosed.

Approximately 7.72 billion shares changed hands on the major domestic equity exchanges, as compared to the 7.53 billion share average over the past 20 trading days.

Retail Sales Up Sharply

Retail sales were up sharply during July as consumers bought a range of goods even as they cut back on motor vehicle purchases, which could help to assuage financial markets’ fears that the economy was heading into recession.

The Commerce Department’s upbeat report on Thursday is not going to change expectations that the Fed will cut interest rates again in September, as the outlook for the economy continues to darken against the backdrop of trade tensions and slowing growth overseas.

The Treasury yield curve inverted on Wednesday for the first time since June 2007, triggering a stock market sell-off. An inverted Treasury yield curve is historically correlated to recessions.

Financial markets have fully priced in a 25-basis-point rate cut at the U.S. central bank’s Sept. 17-18 policy meeting. At the same time, the markets will likely dial back expectations of a 50-basis-point rate cut next month.

Retail sales increased 0.7% last month after gaining 0.3% in June. Compared to the same period a year ago, retail sales increased 3.4%.

Excluding automobiles, gasoline, building materials and food services, retail sales rose 1.0% after advancing by an unrevised 0.7% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

July’s gain in core retail sales suggested strong consumer spending early in the third quarter, though the pace will likely slow from the April-June quarter’s robust 4.3% annualized rate. 

Consumer spending, which accounts for more than two-thirds of the economy, is being underpinned by the lowest unemployment rate in nearly half a century.

While a separate report from the Labor Department on Thursday showed an increase in the number of Americans filing applications for unemployment benefits last week, the trend in claims continued to point to a strong labor market.

Solid consumer spending is blunting some of the hit on the economy from a downturn in manufacturing, which is underscored by weak business investment.

Manufacturing’s struggles were highlighted by a third report from the Labor Department showing productivity in the sector tumbled at its fastest pace in nearly two years in the second quarter, with factories cutting hours for workers.

The economy grew at a 2.1% rate in the second quarter, decelerating from the first quarter’s 3.1% pace. Growth estimates for the third quarter are below a 2.0% rate.

In July, auto sales fell 0.6% after rising 0.3% in June. Receipts at service stations rebounded 1.8%, reflecting higher gasoline prices. Sales at building material stores gained 0.2%.

Receipts at clothing stores increased 0.8%. Online and mail-order retail sales jumped 2.8%, the most in six months, after rising 1.9% in June. They were likely aided by Amazon’s Prime Day.

Receipts at furniture stores rose 0.3%. Sales at restaurants and bars accelerated 1.1%. But spending at hobby, musical instrument and bookstores dropped 1.1% last month.

Jobless Claims Rise

Jobless claims rose to a six-week high of 220,000 in the week ended Aug. 10, and a measure of continuing claims, the number of unemployed who qualify for benefits under the unemployment program, rose to 1.726 million in the prior week for the largest gain since February.

Productivity Rises

Nonfarm productivity grew at a 2.3% pace in the second quarter, exceeding projections, after an upwardly revised 3.5% rate in the first quarter. Unit labor costs increased at a 2.4% pace after a 5.5% gain. That first-quarter figure was revised from a drop and became the largest rise in five years.

Manufacturing Output Drops

Manufacturing output fell during July, ending a run of two months of growth. The Federal Reserve on Thursday said manufacturing production shrank 0.4% last month, a steeper decline than the 0.1% drop expected by analysts in a Reuters poll.

Overall industrial output was down 0.2% in July, after analysts had anticipated a 0.1% gain. The data may add to concerns about the strength of the factory sector amid lingering concerns about a slowing global economy. The July decline was the largest since April. Manufacturing output is down over 1.5% since December 2018, the Fed said.

In July, the decline in factory output was broad-based across several sectors, including wood products, machinery and nonmetallic mineral products, according to the Fed.

Mining output fell 1.8% in July, which the Fed attributed to a sharp but temporary decline in oil extraction in the Gulf of Mexico due to Hurricane Barry. Despite the decline, mining output is still up 5.5% over the last year.

Output for utilities was up 3.1% after falling a similar amount in June.

Capacity utilization for manufacturing, a measure of how fully firms are using their resources, dipped slightly to 75.4% in July. Capacity utilization across all industries, including utilities and mining, was down slightly to 77.5%, and now stands 2.3 percentage points below its 1972-2018 average.

Officials at the Fed tend to look at capacity use measures as an indication of how much more the economy may be able to grow before inflation becomes a concern.

Fed’s Bullard Only ‘Sustained’ Bond Inversion Is Bearish Signal

According to St. Louis Federal Reserve President James Bullard the inversion of portions of the Treasury bond yield curve this week “would have to be sustained over a period of time” to be taken as a “bearish” signal for the economy, which continues to grow.

With economies slowing overseas “you have this flight to safety going on,” that is pushing down U.S. rates even though our economic growth is “reasonable,” Bullard said.

Investors will be listening closely to Fed officials in coming weeks for insight on whether this week’s sharp drop in stock prices and bond yields will lead the central bank to lower interest rates.

A speech by Fed chair Jerome Powell next week in Wyoming, announced by the Fed on Thursday afternoon, could carry particular weight coming after a volatile period for global markets and signs the U.S.-China trade war may get worse.

Bullard, who has supported a rate cut and said he puts weight on the signals given by the bond market, said he nevertheless was not ready to commit to reducing rates at the Fed’s upcoming Sept. 17-18 meeting.

He noted that he was not particularly influenced by what happened in markets this week, and regarded the drop in equity prices as “a little bit overdone.”

With trade tensions and slowing global growth unnerving investors, he said, it is no surprise that stock markets fell and that key parts of the bond yield curve “inverted.” When short term bonds command higher interest rates than longer terms one, it can be read as a warning about upcoming economic growth.

But “the numbers here seem pretty good…2 percent growth. Nice job market. Low inflation. Good consumption growth,” Bullard said. “We are in the middle of a global slowdown and we are just going to have to assess how this is going to affect the U.S. economy.”