Bonds and stocks
1-All beginnings are arbitrary. More, if causes are sought to explain an effect. A short term for this sharp drop that affects bonds and shares globally could be the inflation data in the United States. Last Friday, the US Consumer Price Index (CPI) registered an interannual rate of 8.6% in May, a record since December 1981. In the sequence, after decelerating to 8.3% in April and after the peak of 8.5% in March, reached a new high again, while the monthly comparison stood at 1%, seven tenths more than April and the highest percentage since June 2021. Of course, the figure exceeded all estimates.
This data said two things. On the one hand, that inflation had not made a soft landing and, on the other, that perhaps the Fed’s rate hike had not had all the impact necessary to guarantee that downward path. It is also known that the FED not only acts each time it effectively raises the interest rate, but through its “warnings”, that is, it warns before raising them, allowing the market to adjust (gradually and downwardly).
The Fed and rates
2-As is logical, greater price pressure could motivate the Federal Reserve – which begins its meeting tomorrow – to adjust the interest rate more aggressively. Some FED governors have even suggested (but later backed off) that increases of 75 percentage points would be needed to gain speed of action. Until now, in March it had risen 25 percentage points and in May 50 points. Thus, it came to be in a range between 0.75 and 1%. A higher rate not only makes certain returns more attractive and produces a “flight to quality,” but also makes capital more expensive for those companies that need it to grow, typically technology and innovation firms. Also at cryptocurrencies and all the universe that is familiar to him.
Inflation
3-Although it is more complex, suffice it to mention that inflation is not only due to the increase in food and energy at a global level as a result of the war in Ukraine. The strong post-pandemic demand also plays in the United States, with a supply that is not enough to supply it, which means that services also adjust their price upwards. There is data indicating that the purchasing power of Americans lost for the 14th consecutive month as the average hourly wage rose 5.2% annually, three points below inflation.
Actions
4-If you add a scenario with the cost of more expensive money (rise in rates), a probability that the FED will have to continue to make money (loans) more expensive and purchasing power in decline, then the scenario of a recession could approach dangerously. Here’s another reason for stock markets to drop sharply. When it comes to risk investments, cryptocurrencies are also trapped in these logics. To try a final analysis, add to all this that the numbers represent a problem for the aspirations of President Joe Biden in this year’s legislative elections, with inflation being one of the most questioned points in public opinion.
How far should the Fed go? Is it valid to think that you can apply successive increases until prices stop? Can you run the risk of generating a recession? And if it is delayed so as not to generate a political impact on Biden, could the risk of even higher inflation grow?
Argentina
5-For another focus is the impact in Argentina. Not only stocks of companies with cross-border activity and sovereign bonds could lose level (and they are doing so), but also the commodity markets could retrace their upward path with the consequent drop in foreign currency inflows into BCRA reserves. Of course, the appreciation of the dollar in the world (as a result of the rise in rates, emerging currencies are sold and dollars are bought) will also place greater demands on our Central Bank, apart from the fact that greater risk now reinforces the possibility that investors institutions begin to evaluate changes in their investment strategies, asking the Government for more rates in pesos. The financial dollars could begin to travel a bullish path based on the latter. Also the blue dollar.
Source: Ambito
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