US enters 'technical recession'. But why is Dalal Street rallying?

NEW DELHI: The saying goes — when the US sneezes, the world catches a cold. But even as the data showed the US economy shrank overnight, the domestic market rallied over a per cent, taking its gains to the third straight session.

Are these gains just temporary?

The US economy entering a ‘technical recession’ is not good news for India and the world. But analysts said one should not see too much into the GDP print, as other data points in the world’s largest consumer economy still suggest resilience.

If anything, the GDP print could persuade the Fed to go slow on the pace of rate hike. The data could also weaken the dollar, offering some respite to the rupee, and halt foreign equity outflows in the short term.

Of course, if the situation in developed economies turns worse, India and other emerging economies would also take a hit, said analysts.

“Lower US GDP equals recession equals fewer Fed hikes, a lower terminal rate, equals buy stocks. That arcane logic will be tested at some stage in the future, but not just yet,” said Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA.

Data overnight showed US real GDP declined 0.9 per cent in the June quarter following a 1.6 per cent drop in the March quarter, below the consensus expectations of growth of 0.4 per cent.

“The second consecutive quarterly decline in real GDP marks the beginning of a technical recession, but an official recession depends on broad weakness across labour markets, industrial production and other indicators,” said Nomura India.

“Moreover, considering the upcoming annual revisions to GDP data from Q1 2017 through Q1 2022 on September 29, as well as an expected resilience of gross domestic income (GDI) in Q2 2022, we would caution against putting too much weight on the technical recession, based on the current real GDP series,” Nomura said.

Nomura said while the report there are indications of slowing growth momentum in the US, most of the downside miss relative to its forecast came from volatile inventory changes.

What does it mean for India?

Following the overnight cues, the rupee jumped 30 paise to 79.39 against the dollar in early trade. The dollar index, which measures the movement of the greenback against a basket of six major world currencies, fell 0.46 per cent to 105.86.

The dollar has an inverse relationship with equities. A fall in the dollar is positive for stocks and vice versa.

Emerging markets will benefit in the short term from the softer dollar tone, the rally in interest rate markets and, of course, the boost to equities and so we see a little bit of relief for emerging markets, said Mitul Kotecha of TD Securities.

Kotecha in an interview with ET NOW said that European growth, too, is slowing.

“We will see a mild recession in the US and Europe in our view. All of that does mean that growth in emerging markets could suffer as well, especially as China’s growth engine is not really picking up significantly either. While we will see some relief for emerging markets, we are still playing catch up with higher interest rates in a lot of emerging markets. Inflation is still moving higher in many countries and growth pressures are increasing so it may end up being temporary relief for emerging markets,” Kotecha said.

Gautam Trivedi of Napean Capital said he doesn’t feel that the FII selling, which we saw over the past nine months, will be as aggressive unless the US goes into a very serious recession.

“The probability of that right now seems more in the 30-40 per cent versus it being high and also this talk of a shallow recession, which will be actually a very positive event for India. It is still a cautious wait-and-watch, let us see what the RBI does to help the rupee consolidate at these levels because if it falls further, we have got a real problem with respect to inflation,” Trivedi said.

Meanwhile, as far as US stocks are concerned, Halley said the US markets find themselves in a situation where a US recession is a buy signal for stocks, and decent technology earnings are a buy signal for stocks.

“Don’t feel bad if none of that makes sense; just respect the momentum,” Halley said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

Roy Walsh

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