The Market Today

All Eyes Remain on Russia as Commodity Prices Surge, WTI Oil Highest Since 2008

by Craig Dismuke, Dudley Carter


Initial Jobless Claims Improve Further:  Initial jobless claims for the week ending February 26 fell more than expected, down from 233k to 215k, the lowest level of the year. The seasonal adjustment factors are likely still skewing the results due to less seasonality in the week-over-week results now than during a normal year.  On a non-seasonally adjusted basis, initial claims dropped to 195k, the lowest since before the pandemic.  Continuing jobless claims for the week ending February 19 inched up 2k from 1.476mm. The prior week’s result of 1.474mm remains the lowest tally since 1970.

Fed Communications: Fed Chair Powell testifies before the Senate Banking Panel at 9:00 a.m. CT although we do not expect to hear anything different from yesterday’s message. Also speaking are Richmond Bank President Barkin (11:00 a.m., non-voter) and New York Bank President Williams (5:00 p.m., voter).

Service Sector PMIs and Factory Orders: The February service sector PMIs from Markit (8:45 a.m.) and ISM (9:00 a.m.) are both expected to show broader strength in the aftermath of Omicron. January’s Factory Orders report (9:00 a.m.) is expected to show factory orders up 0.7% MoM.


Powell Reaffirms March Hike: The Fed released the prepared portion of Chair Powell’s Wednesday testimony ahead of the U.S. market open, in which he acknowledged the geopolitical uncertainty but reaffirmed expectations for a March hike. “The implications [of Russia’s attack on Ukraine] for the U.S. economy are highly uncertain, and we will be monitoring the situation closely,” Powell told members of the House Financial Services Committee, adding that it could affect the economy in “unexpected ways” and will require the Fed to be “nimble” moving forward. He characterized the slowdown caused by Omicron as “brief” before describing the labor market as “extremely tight” and acknowledging that inflation “is now running well above” the 2% target. Economic imbalances are making it hard for businesses to find workers, forcing wages up “at their fastest pace in many years,” and keeping inflation higher for longer than anticipated, with “price increases now spreading to a broader range of goods and services.” Against that backdrop, “we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Powell stated.

Powell Supports 0.25% Hike in March, Later Moves Could Be Larger If Needed: The first question posed to Powell got at the heart of the conundrum the Fed faces, equipped with tools that guide the economy by affecting demand but facing an inflation problem rooted in supply-side constraints. Fed policy “cannot affect supply-side conditions,” Powell responded, but “what we’re facing now is an elevated level of demand, in the face of supply-side constraints. … it’s the collision of those two things that’s creating inflation. So there is an important job for us, to move away from these very highly stimulative monetary policy settings to a more normal level of rates, and perhaps tighter.” While the Ukraine situation certainly creates risks for the outlook, it’s too soon to know what the impact will be and he is “inclined to propose and support a 25-basis point rate hike” at the March meeting. “The bottom line is that we will proceed, but we will proceed carefully, as we learn more about the implications of the Ukraine war for the economy,” Powell added. While that essentially settled the waning debate about a 50-bp hike in March, Powell did say in a response to a follow-up question that “we would be prepared to move more aggressively, by raising the federal funds rate by more than 25 basis points at a meeting or meetings,” if inflation doesn’t peak and begin to come down this year as they expect.

Evans, Bullard On Board With March Start of Series of Increases: Chicago Fed President Evans signaled support for Powell’s continued expectation for a “series of rate increases this year,” despite heightened geopolitical uncertainty. Evans said he too supports a move in March and said the Fed may make additional “moves” over several subsequent meetings “for sure.” He again described current policy settings as “wrong-footed” and said “we can increase rates more quickly” if inflation doesn’t moderate as he expects. St. Louis Fed President Bullard echoed Evans’s sentiment about current policy settings, saying they are “exacerbating the inflation problem.” “This situation calls for rapid withdrawal of policy accommodation in order to preserve the best chance for a long and durable expansion,” Bullard concluded.

Beige Book Backs Fed’s Plans to Tighten Policy: The Fed’s February Beige Book, based on information collected prior to February 18, indicated that Omicron’s spread and severe winter weather impacted activity since mid-January. “As a result, consumer spending was generally weaker than in the prior report,” the book noted. “All Districts noted that supply chain issues and low inventories continued to restrain growth,” and were primary factors behind the “robust pace” of price increases across the country. Rising labor costs and high transportation costs were also cited as factors creating inflation pressure.  “A few Districts” said that inflation continued to accelerate and businesses broadly expected to push through “additional price increases over the next several months.” Demand for workers remained strong and labor supply remained tight despite “scattered signs” of improvement in some areas. “Contacts reported they expect the tight labor market and consequent strong wage growth to continue,” the discussion noted.


Markets Sharply Reverse Weekly Moves As Investors Reassess (Again) Fed Expectations (Faster): Rates added to overnight gains after ADP’s payroll estimate topped expectations and Chair Powell reaffirmed the Fed’s plans to raise rates this month. Markets had begun to recover ahead of U.S. trading from sharp declines for both equities and Treasury yields on Tuesday amid continued escalation of fighting in Ukraine and tensions between Russia and the West. U.S. equities extended and added to the positive trend projected by futures in pre-market trading, leading the indices to gains of around 1.8% and final ticks near session highs. The strong recovery rippled through every sector with financial stocks leading the way and energy companies close behind. The energy sector reaped the rewards of another sizeable gain in oil prices that pushed U.S. WTI up nearly 7% to more than $110 per barrel, its highest close since 2011. Banks benefitted from the unusually large increases in Treasury yields that began early with the recovery in risk assets and accelerated during Fed Chair Powell’s testimony (more above). Fed funds futures essentially priced out the likelihood of a 50-bp hike this month but adjusted higher to project more than an 80% chance of six quarter-point hikes in 2022, a sharp recovery from Tuesday’s final pricing for less than a 100% chance of five. The 2-year yield responded by spiking 17.1 bps to 1.51%, significantly cutting into its two-day decline with the second largest daily increase since June 2009. The 10-year yield jumped 14.9 bps to 1.88%, its biggest single-day increase since the volatility in March 2020; excluding March 2020 it was the largest since immediately after the 2016 Presidential Election.

U.S. equity futures leveled off overnight as global equity markets calmed following more volatile trading to start the week. The MSCI Asia Pacific Index closed up more than 0.5% while Europe’s Stoxx 600 traded down 0.4%. U.S. futures were mixed and little changed before 7 a.m. CT. Treasury yields also reflected less momentum, edging lower but only marginally cutting into yesterday’s historically large swings. The downshift diverged with moves across Europe, where sovereign yields continued to recover higher following big declines earlier this week. Oil prices, however, continued to draw major market attention as prices compounded sharp recent gains amid ceaseless fighting in Ukraine and the lack of response from OPEC at yesterday’s meeting. With prices up nearly 4% again on Thursday, U.S. WTI traded up above $114 per barrel, the priciest since September 2008, while Brent briefly grazed $120 for the first time since 2012 before turning back to trade around $117, a new high since February 2013. Another strong jobless claims report didn’t distract markets from their focus elsewhere, leaving the 2-year Treasury yield down 3.2 bps at 1.48% and the 10-year yield 3.1 bps lower at 1.85%.

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