Sensex, Nifty Disappoint: Slow US GDP Growth Hits Markets

The U.S. economy grew at its slowest pace in nearly two years as a jump in imports to meet still-strong consumer spending widened the trade deficit, but an acceleration in inflation reinforced expectations that the Federal Reserve would not cut interest rates before September.

The slowdown in growth reported by the Commerce Department in a snapshot of first-quarter gross domestic product on Thursday also reflected a slower pace of inventory accumulation by businesses and downshift in government spending. However, domestic demand remained strong last quarter. The combination of a slowdown in growth, sticky inflation along with a spike in personal consumption expenditures (PCE) price index not just tipped off a spike in yields on 10-year US bonds but also altered market expectations of seeing just one or two rate cuts in 2024, lower than the earlier anticipated three.

The US GDP grew 1.6% in the first quarter, sharply below Dow Jones estimates of 2.4%. The downbeat growth, largely on account of sticky inflation, also showed that the PCE price index rose 3.4%, well above the previous quarter’s 1.8% spike.

Thursday's report from the Commerce Department said the gross domestic product — the economy’s total output of goods and services — decelerated in the January-March quarter from its brisk 3.4% growth rate in the final three months of 2023. A surge in imports, which are subtracted from GDP, reduced first-quarter growth by nearly 1 percentage point. Analysts estimate that growth was also held back by businesses reducing their inventories.

By contrast, the core components of the economy still appear sturdy. Along with households, businesses helped drive the economy last quarter with a strong pace of investment. “This report comes in with mixed messages,” said Olu Sonola, head of economic research at Fitch. “If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach,” Sonola added. Some economists also worry that lower-income households have depleted their pandemic savings and are largely relying on debt to fund purchases.

The domestic market might see a knee jerk reaction to the US GDP report, however it is the local news that would drive sentiment in the long term, Murthy Nagarajan, Head of Fixed Income, Tata Asset Management, said.

Equity benchmarks the Sensex and the Nifty opened flattish on April 26, weighed down by the slower-than-expected GDP growth in the US, which pushed back rate cuts expectations. Around 9.30 am, the Sensex was up 113.31 points, or 0.15%, at 74,452.75, and the Nifty was up 33.40 points, or 0.15%, at 22,603.70. About 1,892 shares rose, 734 fell, and 96 remained unchanged.

Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital, shared, “As far as the Indian economy is concerned, the economic strength is stronger and that is likely to support the equity market”.

On the technical front, Anand James, chief market strategist, Geojit Financial Services, believes that after opening the day with caution, the Nifty 50 can turn lower once it nears 22,760-22,775 levels. However, he feels that such a move is likely to gain momentum only if the index slips past 22,490. "Meanwhile, 22,670-22,550 is the consolidation band that could retain
positivity, with eyes on 23,200," James added.

Regardless, the broader markets outperformed benchmarks, with BSE Midcap and BSE Smallcap indices gaining up to 0.6% in opening trade. Fear gauge India VIX, meanwhile, rose by 2% to around 11.

As for sectors, all but FMCG were trading in the green. The Nifty IT index was the top sectoral gainer, up nearly 2%, led by a sharp 10% uptick in shares of Tech Mahindra. Shares of the IT services company surged after its CEO chalked out a three-year turnaround plan. Bajaj Finance was another Nifty 50 company that slumped 5% after its Q4 earnings missed the Street's estimates.

Going ahead, quarterly earnings of Bajaj Finserv, HCL Technologies, Maruti Suzuki, SBI Life Insurance, and Shriram Finance will remain on the radar for investors.