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Recession? Really? ↘️

Stocks gained some more last week, taking the July rally to 9%. That’s a lot of rallying given the kind of news flow seen.

  1. The Fed increased rates by another 75 bps

  2. The US economy shrank for a second-straight quarter

Two straight quarters of a declining GDP has been frequently used as thumb rule to describe a recessionary economy.


But in the US, the National Bureau of Economic Research calls it a recession when it sees a significant decline in economic activity.


If the GDP is declining, what are we waiting for?

Economic indicators in the US have been giving out mixed signals.

Negatives

Positives

Inflation is super-high

Fed rate hikes are hard-hitting

GDP has contracted for two straight quarters

Consumption growth is very tepid

The housing market is subdued - no one’s buying

The job market is strong, and unemployment rate is at a low of 3.6%

Job additions for the first half of 2022 has been at 2.7 million

Several areas of the economy have been performing well (travel)

What’s in it for the Indian markets to rise?

After all, when the US sneezes, the world catches a cold, no?



  1. Global cues were positive despite the Fed raising rates This was mainly account of hopes that the US would slow its rate hikes going ahead. The fact that the rate hikes are working (at least to slow the economy down) if not to tame inflation yet, are signs enough that the Fed may take it easier through the rest of the year. Moreover, commentary by the Fed indicated rates of 3-3.5%, which casts a doubt on the longevity and quantum of rate hikes.

  2. FIIs return to the Indian markets? Just some time ago, FII holding in the Indian markets was at multi-year low. However, the last month saw a dramatic reduction in selling. So far in 2022, FIIs have sold US$ 29 billion in Indian equities. June 2022 saw selling of US$ 6 billion. And July - selling of only US$ 146 million.

  3. The dollar weakened (a little bit) A strong dollar is not good for India. Stuff that we import (oil) gets more expensive to buy, and our deficit numbers go for a toss. On anticipation of slower rate hikes, the US dollar weakened a little, after weeks of rising against currencies. This has provided some respite to the markets as well.

  4. Sector drivers Some sectors drove a majority of the rally on the benchmarks - mainly oil & gas, banking and IT services. Oil & gas, as the government reduced the windfall tax it had earlier brought in to take a cut on the abnormal profits companies like Reliance were making. Banking, because of the rising rate scenario. And IT services, as deal data didn’t turn out to be disappointing despite the state of the US economy.

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