Inflation and recession: It's an explosive mix for the financial markets, which ended the week on a decline across the board, whether it be stocks, bonds or all currencies against the dollar. The reason why is because Jerome Powell, the chairman of the US Central Bank, is determined to raise rates as much as necessary to fight inflation (8.3% in August), even if it means risking a recession. Since March, the Fed has raised rates five times, from zero to over 3%, and this trend is expected to continue to reach at least 4.5% in 2023. On top of that can be added the UK's fiscal stimulus, the threat of a recession in the eurozone and the Russian military escalation in Ukraine.
Wall Street hates it; they anticipate higher costs for companies and a drop in profits. US stocks continued their creeping crash on Friday, September 23. The Dow Jones Industrial Average (-1.6%) hit its lowest level since 2020, while the large-company S&P 500 index (-1.7%) and the tech-rich Nasdaq (-1.8%) were close to the lows they hit in June. Year-to-date, the three indices have corrected by 18.5%, 22.5% and 30.5%, respectively.
Stocks are being knocked down by rates, which are continuing to rise in the wake of the Fed's increase in the cost of money. The risk-free 10-year rate is now above 3.70% – it hit a high of 3.82% on Friday, a record rate since 2010. Meanwhile, the two-year rates have soared above 4.2%, up from 0.2% a year ago. Rates on 30-year mortgages are now at 6.3%. A real estate crash is therefore looming in the United States with surging real estate costs in a market boosted for three years by free money from the Fed, and also because many Americans moved to larger homes due to Covid-19.
The price of West Texas Intermediate crude oil (the US benchmark), faced with the risk of recession and lower energy demand, has fallen by more than 5%, dropping well below $80 a barrel, compared to the record high of $130 it reached in March at the start of the war in Ukraine. The black gold is back to its January levels and is dragging most commodities in its wake, affected by a possible global recession. Copper, which generally reflects the planet's economy, has lost a quarter of its value since the beginning of the year, despite the need for the energy transition. Bitcoin (about $18,800) is at its lowest since the end of 2020.
The dollar is soaring
The dollar continues to soar. It is at its highest level against all currencies since 2002. However, it is the opposite for other currencies: The euro fell below $0.97 on Friday for the first time in 20 years; the British pound is at its lowest level since 1985; the yen is so low that the Bank of Japan had to intervene for the first time since 1998 to support its currency. This surge in the dollar, which is deflationary for the United States, but inflationary for countries that import dollar-denominated goods, is punishing governments that are slow to raise interest rates and tighten their budgets to fight inflation. US analysts are starting to recall the precedent of the 1980s, when the Fed's fight against inflation caused rates to rise and the dollar to soar. In 1982, Mexico was hit by a terrible debt crisis, soon followed by many developing countries.
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