Biden’s record inflation threatens Democratic re-election

With the release of official US inflation data at 1.3% per monthaccumulating a up 9.2% in the last 12 monthsthe markets reacted sharply: the dollar appreciated due to the expectation of higher interest rates (two increases of 75 basis points in the next FOMC meetings), beating parity with the European currency (1 euro = 1 dollar) for the first time since 2002. But not only: also the longer yield curve has inverted at the vertices of 30 years against 2 years for the first time since 2007, pricing in a higher probability of economic recession.

We could take the inflation data and break it down, showing that, in several sectors, the rise was the highest in decades. But Let’s focus on an important aspect that has a much more lasting impact than this upswing cycle: the likely outcome of the US Congressional and Senate elections on November 8.

Since his election, the government of Joe Biden (pictured) has had a precipitous drop in its approval, for several reasons; some directly linked to the president’s performance and personal characteristics, others linked to the dissatisfaction of his electoral base with the policies introduced. People are dissatisfied with the inflation that was already rising sharply before the invasion of Ukraine, but also with the constantly broken promises regarding the intensity and duration of the inflationary phenomenon.

Today’s number once again contradicts the Fed, which had said the inflationary peak had passed.bringing a feeling of lack of control to a population and an economy that are not used to this type of movement (unlike us) and that feels lost when it observes that its leaders cannot consistently get ahead of problems.

On the electoral scene, Biden’s approval numbers were already falling sharply, and there was a silent consensus that Democrats would lose their majority in the House and that they could lose in the Senate.

This scenario improved a little for them when the conflict between Russia and Ukraine began. Traditionally, being patriotic, the American people tend to support the president at first. As usual, that support after a while turns into rejection, as we’ve seen in every war the US has been involved in since Vietnam.

In this case, the phenomenon was much faster, perhaps for three reasons: the absence of American soldiers directly involved in the war, the fact that we are not talking about a traditional ally and the perceived high local cost to the economy. Soon, the popularity gains were brief, and the Democratic administration’s approval ratings plummeted again.

Then came the announcement of the Supreme Court reversing a 1970s decision that approved abortion in federal territory. This decision caused outrage in the Democratic base, and the leaders used the moment to try to convince them to mobilize and vote en masse to guarantee a majority in the Houses, which would make it possible for a constitutional law to be passed to federalize the right to abortion. This stance, while widely promoted locally, has not had much effect: recent surveys show that the rank and file’s main concern remains, first, with inflation and, second, with the mental health of the executive’s leader.

After today’s dicewhich leaves the Fed with its hands tied and almost guarantees more suffering for the population, It is possible to say that Democrats are likely to lose their majority in both legislative houses, which practically ensures that no more ideological-partisan measures will pass until the end of Biden’s term.. As a result, this should further irritate the current base, which is already extremely dissatisfied. This effect even threatens Biden’s re-election in 2024, which would make him the first president not to run for reelection since Lyndon Johnson in 1969.

On the other hand, looking at market effects, since current policies have been unsuccessful, some banks such as JP Morgan and Citi already predict a reasonable probability of having a rally end of the year if this scenario materializes. So, for us Brazilians, maybe it’s not a bad prognosis.

Rodrigo NataliChief Strategist at Inv Publications

note: The analysis of international politics is essential to understand the behavior of world markets, which directly influence Brazilian companies. Rodrigo Natali brings his view on this and other factors to protect and monetize your investments in the series Você Gestor, by Inv. Meet her here!

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