Wall Street rises as economic and financial troubles pile up

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If one were to take the movement of stock prices on Wall Street as a guide, then the problems for the financial system and the wider economy resulting from inflation and interest rate hikes by the US Fed and other central banks are in decline.

The Wall St. street sign is framed by American flags flying in front of the New York Stock Exchange, Friday, Jan. 14, 2022, in the Financial District. (AP Photo/Mary Altaffer)

Since bottoming out in mid-June, the interest rate-sensitive, tech-heavy NASDAQ index has risen more than 20%. During the same period, the broad S&P 500 index rose 17% while remaining down 10% for the year. The Dow is also up from its June lows.

The market’s rise was driven by the belief that inflation is beginning to decline – official July figures showed no increase, bringing the annual US inflation rate down from 9.1% to 8.5% – and the Fed will begin to relax. on its rate hikes after two consecutive hikes of 75 basis points each.

The view is that if this happens, then the orgy of profit based on cheap money can resume.

But looking beyond Wall Street, it becomes clear that, far from being alleviated, the problems in the financial system and the global economy are getting worse.

In the former case, the Fed could reverse interest rate hikes at its September meeting – there is expected to be a hike of 50 basis points instead of 75. However, officials from the Fed have made it clear that the central bank is far from finished in its efforts to ensure that a working class wage movement in response to price increases is suppressed.

The Fed’s program is part of an international strategy by the world’s central banks to drive down the living standards and social conditions of the working class in the name of “fighting inflation.” At this point, this social counter-revolution is expressed most clearly in the United Kingdom, where the Bank of England has raised interest rates in an attempt to plunge the economy into a recession to counter wage demands.

In an interview with the FinancialTimes last week, San Francisco Fed President Mary Daly indicated that a 0.75 percentage point hike was not out of place in September, when her “baseline” was an increase of 0.5 percentage points.

Although there is “good news” in the monthly data, inflation “remains far too high and far from our price stability target”. It was too early to declare victory over inflation, she said, and “we’re not done yet.”

Minneapolis Fed President Neel Kashkari said he still expects the Fed to assess its base rate an additional 1.5 percentage points by next year, bringing it to around 4.4 %.

In an interview last week, St Louis Fed President James Bullard, considered one of the most hawkish members of the Fed’s governing body, pointed to the key driving force behind rate hikes. “We have a long way to go in the job market,” he said.

Bullard was speaking of what is seen as a “tight” labor market, saying there would need to be hard, widespread evidence of disinflation “before we can be truly confident.” This evidence will indicate that even the limited wage increases, below the rate of inflation, that workers have so far been able to obtain, have ceased.

As commodity prices continue to rise – groceries, for example, are up more than 13% – are clear signs of recessionary trends. U.S. gross domestic product has been negative for each of the past two quarters, a situation sometimes described as a “technical recession” with indications that the contraction is continuing.

On Monday, a New York Federal Reserve survey of manufacturers recorded minus 31.3 for August from 11 the previous month. The forecast was for a reading of 5 and the fall in the so-called Empire State Gauge was the second biggest monthly drop on record.

Signs of recession are also emerging in financial markets as the so-called inversion of the yield curve – a situation in which the interest rate on short-term government debt is higher than that on 10-year Treasury bills – persists. Over the past 50 years, this reversal, contrary to the normal situation, has been a reliable indicator of recession.

There are also clear warning signs of a marked slowdown in the world’s second largest economy, China.

On Monday, the People’s Bank of China (PBoC) unexpectedly cut its medium-term lending rate by 10 basis points in a bid to stimulate the economy amid slowing consumer demand, falling industrial demand and deterioration in the housing and real estate market.

In the second quarter, the economy narrowly avoided a contraction, growing only 0.4%, and the problems seem to be getting worse.

July data shows retail sales rose just 2.7% for the year, compared to forecasts of a 5% rise, while industrial production rose 3.8%, compared to forecasts of a 4.6% increase.

Chinese financial authorities have been reluctant to ease financial conditions due to concerns over rising debt. But Julian Evans-Pritchard, senior China economist at Capital Economics, told the FT that the PBoC appeared to have decided it faced a more pressing problem.

“The latest data shows lackluster economic momentum in July and slowing credit growth, which has been less sensitive to policy easing than in previous economic downturns,” he said.

Real estate and housing, which account for more than a quarter of China’s economy when flow effects are taken into account, are at the center of the decline in economic growth. This threatens to make the official growth target of 5.5% for this year – itself the lowest target in more than three decades – a dead letter.

Data released on Monday shows new home prices posted their biggest year-on-year decline in more than six years in July.

In the comments at the wall street journal Last week, Logan Wright, director of Rhodium Group, a New York-based research firm that tracks China closely, said, “We’ve never seen a housing market downturn of this magnitude and severity.” Financial authorities could do little to reverse the situation, he added.

There are significant financial effects. More than 30 property developers have now joined real estate giant Evergrande in defaulting on their international debts.

The issue of defaults is by no means limited to China. Rising international interest rates have created the conditions under which a number of less developed countries will be unable to repay their loans.

Sri Lanka is already in this situation and others, including Kenya, Egypt, Bangladesh and Pakistan, could follow. Emerging market borrowing, even before COVID hit, fell from $3.3 trillion, or a quarter of economic output, to 5.6 trillion, according to Leland Goss, general counsel at the International Capital Markets Association. trillion dollars, or about a third, in a decade.

Goss told the FT the prospect of a “possibly systemic debt crisis” was real. “Creditors exposed not to just one or a few, but to many sovereign borrowers could have significant aggregate exposures” with “potential systemic implications” if they were large financial institutions, he said. he declares.

A report released late last month revealed that emerging markets are already being hit by cash outflows. The Institute of International Finance reported that outflows from emerging markets in July amounted to $10.5 billion, bringing the total to $38 billion over the past five months, the longest period of outflows since the recordings began in 2005.

Fluctuations on Wall Street are driven by the shortest of short-term considerations. Interest rate hikes by the Fed may ease somewhat and therefore the market will rise. But the longer-term implications of the hikes so far have yet to fully take effect. They will start to have an impact when the debt, incurred when interest rates were close to zero, will have to be refinanced.

According to the rating agency Fitch, defaults on US high-yield debt could double this year to 1% and also double in Europe to 1.5%. Other estimates put the rate even higher, up to 4% per year.

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