Stocks rose sharply on Thursday as expectations of a de-escalation in trade tensions took hold once again after Washington and Beijing agreed to hold high-level talks next month. Meanwhile strong economic data eased fears of a domestic slowdown. The S&P 500 has largely recovered and is now less than 2% short of its July 26 record high close. The benchmark index has climbed 2.4% in the past two sessions.

China and the United States agreed to hold talks in early October in Washington, boosting markets as investors bet on a thaw in the trade war between the world’s two largest economies, which has taken a toll on global growth. 

The S&P information technology index rose 2.1%, while the financials index rose 1.9%. The interest rate-sensitive S&P 500 Banks Index was up 2.5%, following a rise in Treasury yields. 

The ADP National Employment Report, considered a precursor to the Labor Department’s more comprehensive jobs report, showed U.S. private employers’ payrolls grew at the fastest pace in four months in August, led by big gains in service-sector jobs.

Another private survey showed growth in U.S. services sectors accelerated in August, rebounding from its weakest level in nearly three years, as new orders rose to their highest level since February amid trade worries.

The upbeat reports eased concerns of an economic downturn, which was exacerbated by data on Tuesday that showed a contraction in factory activity in August.

Sectors viewed as defensive declined, with the S&P utilities index, real estate index and the consumer staples index all down.

Approximately 7.5 billion shares changed hands on the major domestic equity exchanges, as compared to the 6.8 billion share daily average over the past 20 trading sessions.

Services Sector Picks Up Speed

Services sector activity accelerated in August and private employers increased hiring, thereby suggesting that the economy continues to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession.

The upbeat reports on Thursday took some of the sting from data this week that showed the manufacturing sector contracted for the first time in August as the year-old trade war between the United States and China intensified.

However, given the erosion of business confidence as a result of the trade impasse and the threat it poses to the longest economic expansion in history, the Fed is still expected to cut interest rates again this month. Meanwhile, China and the United States on Thursday agreed to hold high-level trade talks in early October in Washington, according to the Chinese commerce ministry.

The Institute for Supply Management (ISM) said its non-manufacturing activity index increased to a reading of 56.4 in August from 53.7 in July. A reading above 50 indicates expansion in the sector, which accounts for more than two-thirds of U.S. economic activity.

According to the ISM businesses, “remain concerned about tariffs and geopolitical uncertainty,” but also noted “they are mostly positive about business conditions.” The reports and news that Washington and Beijing had agreed to resume trade talks next month propelled U.S. stock indexes to more than a one-month high. 

The Atlanta Fed is forecasting the economy will grow at a 1.5% annualized rate in the third quarter, slowing down from a 2.0% pace in the April-June period.

August’s surge in services industry activity reflected increases in measures of production and new orders. Export orders, however, fell as did imports. The ISM said 16 service industries, including retail trade, utilities and public administration, reported growth last month. Wholesale trade was the only industry reporting a decrease in growth.

However, a gauge of services industry employment dropped to 53.1, the lowest level since March 2017, from 56.2 in July.

That, together with a contraction in manufacturing employment, suggests nonfarm payrolls probably increased at a steady clip in August, even though the ADP National Employment Report on Thursday showed private payrolls surging by 195,000 jobs this month after rising by 142,000 in July.

The ADP report, which is jointly developed with Moody’s Analytics, came ahead of the release of the government’s more comprehensive employment report on Friday.

The ADP report, however, has a poor record forecasting the private payrolls component of the government’s employment report because of differences in methodology. Given that August payrolls generally undershoot expectations, the ADP report did not change economists’ forecasts for steady gains.

Nonetheless, the pace of employment gains remains well above the roughly 100,000 jobs needed per month to keep up with growth in the working-age population. The unemployment rate is expected to have held at 3.7% in August for a third straight month.

Labor market resilience was also underscored by a third report from the Labor Department on Thursday which showed initial claims for state unemployment benefits increased 1,000 to a seasonally adjusted 217,000 for the week ended Aug. 31.