For the economy, companies and consumers there is probably nothing worse than stagflation, and this is exactly the scenario that investors seem to fear at the moment.
We have already written about the possibility of stagflation in March 2020, which was associated with the aftermath of the pandemic and lockdown.
In stagflation, prices remain high and consumers forgo goods that are not necessities. They spend more on fuel (oil becomes more expensive) and on heating their homes (coal, wood and gas become more expensive). Food prices are also rising. If wages do not rise quickly, consumers may cut back on spending on other goods, which may significantly undermine the prospects for economic growth. This, in turn, can negatively impact corporate earnings, which can already be seen in stock market indices.
Wall Street facing stagflation
The Wall Street stock market ended trading Monday in negative territory, with the Dow Jones down more than 300 points, the S&P 500 down more than 1.5 percent and the Nasdaq down more than 2 percent, hitting its lowest level since June. Technology stocks have been major drags on high Treasury bond yields as concerns about sluggish economic growth, high inflation and rising commodity prices persist. In turn, U.S. President Joe Biden said he cannot guarantee the government will not exceed the $28.4 trillion debt limit unless Republicans join Democrats in voting to raise it. At the same time, concerns persist over debt-laden Chinese property developer Evergrande Group.
Europe facing a slowdown
European stock markets also lost on Monday, with Frankfurt's DAX falling nearly 1 percent to a 5-month low in the region of 15,000 points. It appears that Europe just after China may start to see a slowdown with inflation hitting record highs this winter. The main indicator for the slowdown may be the PMIs we will learn in the final months of this year, whose readings may fall below 50 points. It is worth remembering that sometimes stagflation can lead to deflation, as the high base effect of commodity prices and, over time, stabilization in these markets can lead to a cumulative decline in prices in the economy. This in turn could be a powerful blow to stock market indices.
Oil continues to rise
WTI crude oil futures jumped to nearly $78 per barrel on Monday, the highest level since November 2014. This has already happened after OPEC+'s decision to maintain the planned increase in the oil production limit by 400,000 barrels per day for November, despite the fact that there is pressure from some countries to increase production beyond the planned value in order to stabilize prices. OPEC+, however, is implementing the agreement approved in July to increase production by 400,000 bpd per month until at least April 2022.
This appears to be another piece of the stagflation puzzle, as, without a drop in energy commodity prices, it may be difficult to head off the risk of stagflation during an economically difficult winter.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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