Wall Street warning shot: markets worried about stagflation and political blockage in Washington

Wall Street unscrewed, Tuesday, September 28, with a decline of more than 2% of the S&P 500 index while the Nasdaq, the index rich in technology stocks, lost 2.83%.

Markets may recover quickly, such is the abundance of liquidity in a world where central banks are still setting the price of money at zero, and indices are still close to their highs – the decline is limited to 4.25 respectively. % and 5.6% for the S&P 500 and the Nasdaq since their highs in early September and the increase since the start of the year remains + 17.6% and + 14.5%. But the warning shot is serious.

Obstacles to the recovery of the global economy

The clouds are building as the risk of “stagflation” – stagnation accompanied by inflation and unemployment – arises.

First worry, inflation, which has exceeded an annual rate of 5% in the United States for more than three months. Recently, the US Federal Reserve (Fed, central bank) estimated that this is a temporary movement, due to bottlenecks and that the return to normal would occur in 2022.

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The discourse is now more mixed: this return to normal will take longer than expected while the obstacles to the recovery of the world economy multiply. There are of course the semiconductors, which hamper the recovery of the American automobile; but also the surge in freight costs, due in particular to blockages in the port of Shanghai or Long Beach-Los Angeles in California; and now the oil shock which hits the planet with a price per barrel above 80 dollars for the first time in three years.

As a result, investors now believe that the normalization of US monetary policy will happen faster than expected, with the reduction in purchases of debt issued by banks and companies from November and possibly a hike in rates. interest – fixed between zero and 0.25% since the start of the pandemic in March 2020 – from 2022. Logically, the ten-year American interest rates have risen, with a return required from operators rising to 1.56 % during the session, its highest level since June 2021. These rates were still at 1.3% Thursday, September 23.

A taste of déjà vu

This normalization considered inevitable if the Fed wants to prevent inflation from slipping is all the more annoying as the United States economy is far from having regained full employment, as deplored on Tuesday before Congress. , the president of the monetary institution, Jerome Powell. She is experiencing labor shortages in services and facing low morale due to the Delta variant of Covid-19. Between its two objectives – inflation and full employment – the central bank risks finding itself torn.

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