What the Jackson Hole Summit commentary augurs for global financial markets

Abhishek Bansal

At the annual Jackson Hole Summit, US Federal Reserve Chairman Jerome Powell said that the global economic outlook has been deteriorating and that the Federal Reserve will act appropriately to sustain the expansion.

Powell sounded concerned about the US trade war with China and the European slowdown, but emphasized that the US economy is close to both its goals of achieving price stability and full employment.

The US economy is giving mixed signals as weakness in industrial production and manufacturing is a matter of concern. However, the services industry is holding up in recent months, although not as brighter as at the start of the year 2019.

US Real GDP grew by 2.1 percent in the second quarter, which is in line with expectations. US jobs growth remains robust; the unemployment rate was at 3.7 percent in July, which is still the lowest in 50 years.

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Abhishek Bansal

Founder and Chairman|ABans Group of Companies

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Consumer spending has increased by 3.9 percent and retail sales have increased by 3.4 percent over the past 12 months. The significant gains have come in retail sales in the most recent four months. Even disposable incomes grew faster, up 4.7 percent, which has led to increased savings.

Residential construction is light at 1.253 million housing units. US exports have remained flat for the last year and have marginally declined in the current year. Imports also showed a similar pattern.

Germany’s GDP has shrunk 0.1 percent in the second quarter giving a signal that the slowdown in the Eurozone growth is here to stay. UK's departure from the EU is impacting Europe's largest economy. ECB minutes shows that Central Bank is preparing easing measures, including a potential rate cut, to stimulate the Eurozone economy, which grew 0.2 percent in the second quarter.

In the last few days, tensions between US and China escalated sharply over tariff issues. China's Ministry of Finance has announced applying new tariffs between 5 percent and 10 percent on $75 billion worth of goods in response, while President Trump tweeted last week to boost tariffs on $550 billion of Chinese imports in retaliation.

In recent months, central banks of China, Malaysia, South Korea, Indonesia and the Philippines have opted for accommodating measures and India has also followed suit.

US Federal Reserve future actions

In July 2019, US Federal Reserve announced a 25 basis point cut in interest rates -- the first rate cut in 11 years. The world economic situation remains fragile and subdued; downside risks remain high in the backdrop of the current trade war damage and slowdown in the euro economy.

We see 2-3 more rates cuts this year by the US Federal Reserve. We can see Fed taking a longer-term outlook on the world economic situation. The economy remains unpredictable and the rate cut decision depends on future economic data.

Equity markets have remained volatile, but are still at higher levels, while gold rallied to a six-year high following a drop in Yuan against the dollar and comments from the US President regarding trade talks with China.

Impact on Indian Currency and Bonds

Theoretically, a rate cut in the US should be positive for developing economies, such as India, which have higher inflation and, thereby, higher interest rates in comparison to developed economies such as the US and Europe. As a result, FII’s could borrow money in the US at low-interest rates in dollar terms, and then invest that money in bonds of Indian rupee denomination to earn a higher rate of interest.

Indian bond markets have rallied sharply on account of rate softening by the RBI as well as a rate cut by the US Fed. India's sovereign bond yield recently dipped to a 10-year low.

The US dollar may fall against a basket of major currencies and this is expected to give a boost to the rupee, which will enjoy a good run amidst strong foreign capital inflows.

The Indian rupee, which has dropped to its lowest level of 2019, may consolidate for a while. As foreign fund inflows improve, the rupee may appreciate from current levels.

(The author is Chairman at Abans Group.)

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