It’s always the same story, Wall Street vs. Main Street. As the real country tightens its belt to the point of ripping off AT&T phone bills, the New York Stock Exchange is all a blooming of lights. Because the war is over, and by war we must understand the war against inflation, which fell to 8.5% in July from 8.7% in June. It is the first setback after 16 consecutive months of bullish tears and also affects the underlying part (which excludes food and energy), which falls to 5.9% from the previous 6.1%. The risk, however, is one: confuse a truce with a withdrawal. And it’s a big one, as this misunderstanding brings with it the belief that the Fed’s tightening of currency pegs is now at the end of the day.
In fact, the market points to a rate hike of 0.50% in September, therefore lower than the 0.75% initially estimated, but above all it is already discounting a cut in the cost of money between January and July of next year. Just two months ago, fed funds futures indicated it was likely to decline by half a percentage point over the same period. For investors it is a net score change. The belief that the pigeons will fly again soon in the Eccles Building is the reinforced concrete that strengthens the foundations of the bullish trend on Wall Street (+1.5% the Dow Jones, +2.4% the Nasdaq yesterday at one hour closing) and prompts some portfolio managers to proclaim: eliminate stagflation and introduce a growth strategy. It matters little if US central bank chief Jerome Powell has so far kept himself very well informed about the institute’s future moves. Neither the invitation to caution addressed yesterday by the US president, Joe Biden (There are some signs of moderation in inflation. We expect headwinds, but the situation is improving), and the warning that came from the former president of the New York Fed , Bill Dudley (Market speculation on a Fed pivot, the point beyond which rates no longer rise, ie, is exaggerated and detrimental to efforts to reduce inflation).
The feeling of some analysts is that the markets are victims of a collective error: they react as if the current Fed were like the one that between 1990 and 2001 did not hesitate to end the rate squeeze to help the US get out of the technical recession. Today the country is in that condition, but there are no signs of financial instability to induce the Washington institution to change course. For example, yield spreads between Treasuries and junk-rated corporate debt appear to be under control. However, it is precisely the numbers that should induce Wall Street not to be carried away by an excess of optimism, perhaps fueled by the aphorism of the former Secretary of State of the United Kingdom, Leon Brittan, according to which a month is not trendy, but also remember that every trend starts with a month.
Of course, the situation could improve if those exogenous factors are taken off the table (supply chain disruption and oil and gas price shocks) that have inflated prices, but there is still a mountain to climb before the cost of life re-enter the stage. channel normality. If there are no increases between now and the end of the year – an unlikely scenario – prices will fall to around 5.5%, more than double the Fed’s 2% target.
Meanwhile, the increases in energy prices +32.9% annually, while the prices of the shopping basket have soared in 12 months by 10.9%, the fastest pace since May 1979. These are the two spending items that end up weighing more on family budgets, also under pressure due to real wages (that is, net of inflation) that fell by 3.6%. And in the coming months, the financial resources of households with a mortgage will tend to decrease even more. On Main Street it’s not time to turn on the lights yet.
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