For the last two years, the US markets have been in a strange place - bad news for the economy, meant good news for the stock markets. In America’s war against inflation, the Fed ended up raising rates at the highest quantum, in the shortest duration - making it the steepest hike in history.
However, the economy was extremely resilient, making inflation tough to combat, and casting a doubt on the impact of Fed’s actions. Here, any good economic data would be looked at as a failure, and the markets would fall.
And then the tide turned! Inflation came under control, and the economy started seeing the repercussions of aggressive hikes. The markets then started celebrating bad news, as Fed would finally be prompted to cut rates, and get back to boosting the economy.
And now we’re at complete 180! Last week’s economic data was not just bad enough to make the markets happy about a potential rate cut, but it was bad enough to start getting concerned that the economy may in fact be painfully hurt.
The US markets took a nosedive with the Nasdaq plummeting by 3%. The ripples were felt across the globe, including in India, where the market dipped by 1.2%. Time to start getting concerned?
What Happened?
On Friday, the US job report dropped in, with numbers weaker-than-expected, sparking fears of a slowing US economy. Wall Street, predictably, had a bit of a meltdown. The S&P 500 and Nasdaq both took nosedives, with tech stocks leading the charge downhill.
The unemployment rate came in at 4.3%, higher than 4.1% in the previous month, and the highest since 2021. Job additions stood at just 114,000 in July 2024, versus an average of >250,000 throughout last year.
Why Does it Matter?
A softer job market usually nudges the Federal Reserve towards rate cuts. Rate cuts generally cheer up stock markets, but this time around, it feels more like a Band-Aid on a deeper wound.
Investors are worried that these cuts are more about preventing economic collapse than sparking growth. The vibe is less "Hooray for cheaper loans!" and more "Uh-oh, is the economy in trouble?"
What Will the Fed Do?
The US economy might have a ‘hard landing’ in store, instead of it being a ‘soft landing’. Simply, the transition from rate hikes to rate cuts, could either be smooth, with economic data not taking a hit; or it could be a rough road - one marked by economic struggles.
The fears of it being the latter would perhaps mean steeper rate cuts, sooner.
What About India?
If the US economy hits a bad place, it means trouble for the markets worldwide. Global slowdowns do have an impact on the Indian economy too. As a reaction, the Indian markets too can take a hit, along with other global markets.
However, rate cuts by the US, could also prompt the RBI to consider rate cuts - after all several central banks have already made cuts. That said, with growth high in India, and inflation not satisfactorily under control yet, the RBI might not make the cut yet.
We still have enough room, and the central bank might just wait for either inflation to cool down further, or growth to need support from monetary policy. But for either reason, when the RBI does take the cutting decision, it will prove as a catalyst for the markets.
The Indian markets dipping because of what’s happening in the US, might just turn out to be a good buying opportunity given the strength of the economy, and potential cuts to combat any consequent slowdown.
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