Technical recession equals buy stocks

Wall Street rises after GDP decline

US GDP had a nasty surprise for everybody overnight, unexpectedly falling by 0.90%, when market expectations were for a modest 0.50% gain. That marked two consecutive negative quarters of US growth, meaning that for many economists, the US is now in a technical recession. Off course, if you put a group of economists in a room today and ask them what two plus two is, none of them will agree with each other. And so, it is with the definition of a recession.

I am not an economist, but I did note something very interesting last night. Two economics research houses that we subscribe to here at OANDA, full of very brainy people, had two different opinions on the US economy for the rest of this year, post that GDP number. One said other indicators such as unemployment would catch up with the GDP, confirming a real and not academic recession. The other said that this is the worst it should get, and the US economy will improve in Q4. So basically, nobody has a clue what is going to happen.

I am not an economist, and a regression is something the wife says to me, amongst other words like potato, as I head out to rugby practice on Tuesdays. Here at “Voice of Reason Research,” I am struggling to join the gloom and doom mob while US employment and job opening metrics remain robust. We may get more clarity on the direction of travel of that piece of the puzzle at next Friday’s US Non-Farm Payrolls.

Still, the weak US GDP data did produce an entirely predictable reaction by markets in the current climate. US bond yields headed lower, and the US dollar retreated. Notable was the continued culling of the USD/JPY long trade, the pair fell by 1.73% to 134.25 overnight, and the thinning of the herd looks like it still has plenty in it. Asian currencies finally started rising versus the greenback as well. For the FOMO gnomes of Wall Street, the calculation was easy. 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.

US equity index futures are on fire in Asia today as well, rising impressively after Apple announced robust earnings and Amazon knocked it out of the park, both after the closing bell. US equity 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.

Bucking the trend, South Korean Industrial Production rose by 1.90% MoM in June, and Japan’s Industrial Production jumped by 8.90% MoM in June. The year-on-year data still looks soggy, but the shorter-term data suggests it’s not all doom and gloom out there in Asia and that demand for semiconductors and high-end manufactured products remains strong. The problem remains on the consumer side, with Retail Sales in June for South Korea and Japan disappointing, falling 0.90% MoM, and rising 1.50% YoY, respectively. Both were quite bad misses and appear to reflect the impact of rising costs of living.

Australia’s PPI came in slightly lower at 1.40% QOQ Q2, potentially easing some RBA hiking nerves in the lucky country. And even New Zealand’s Consumer Confidence rose slightly in July to 81.90. Strange days indeed.

China’s Politburo reiterated its 5.50% GDP target for 2022 while reiterating its covid zero policy at the same time. But China’s Commerce stated that the domestic consumption recovery is not yet solid and more measures to boost it would be necessary. They also said that foreign trade faced high risks, difficulties, and uncertainties, according to Reuters. How that all coincides with a 5.50% GDP growth this year, I know not, and neither do China markets either, it seems. Chinese equity markets are sharply lower today.

For the rest of the day, German and Eurozone GDP Growth Flash for Q2 and Eurozone Inflation will take centre stage. The GDP data has downside risks for obvious reasons, but Inflation has upside risks, and a print above 8.60% will have the words stagflation and Europe used in a lot of sentences. The euro has been unable to exploit a weaker US dollar and rally meaningfully. Lower GDP and higher inflation numbers could see the euro, and European equities, end the week on a sour note.

US Personal Income and Expenditure MOM for June round out the week, expected to rise by 0.50% and 0.90%, respectively. If the US consumer is still alive and well and the data is strong, the FOMO gnomes of Wall Street may temporarily pause for breath. Conversely, weak data probably sees another wave of buy everything as Wall Street prices in the now data-dependant Fed hiking less aggressively.

Happy Friday, everybody. I will be away for next week from Monday to Thursday next week, as Mrs Halley and I travel from Jakarta to Bali, where we will be reunited with both of our girls for the first time in over three years for a family holiday. ​

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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