The Market Today
Fear Grows; U.S. Considering Russian Oil Ban
by Craig Dismuke, Dudley Carter
Russia – Ukraine Meeting; Consumer Credit: The immense geopolitical uncertainty has all eyes on a third round of talks between Russian and Ukrainian officials today. Market volatility in Asian and European trading overnight underscores the economic risks presented by the war in Ukraine. Elevated energy prices are expected to further weigh on consumer psyche and disposable incomes at an already tenuous time. Given the duration and depth of the situation, this is increasingly likely to affect monetary policy decisions. The odds of a 50 bps hike in March evaporated last week (more below) and futures contracts are pricing in fewer rate hikes for the full year. Also on today’s calendar is the January Consumer Credit report.
Fears Ramp Up: Rumors circulated over the weekend that the White House was considering a ban on Russian oil. With conditions in Ukraine deteriorating further and risks of foreign involvement seeming to grow, markets responded sharply upon opening in Asia. WTI oil futures shot above $130 per barrel yesterday evening but have settled back down to $119. Gold jumped above $2,000 per ounce but is now back to $1,974. The U.S. Dollar spiked but the euro, reflecting the region’s dependence on commodity imports, fell below parity with the Swiss franc for the first time since 2015. The Euro Stoxx 50 fell another 5.0% at the open but has recovered most of that loss. The 10-year Treasury yield, which was trading below 1.67% overnight, is coming into this morning’s session at 1.79%. All eyes will be on a third round of talks between Russian and Ukrainian officials today.
OTHER ECONOMIC NEWS
ICYMI – March 4, 2022 Weekly Market Recap: Markets were focused on Russia’s invasion of Ukraine last week, with fears pushing the 10-year yield down 24 bps to 1.73%. The Russian ruble collapsed more than 30% against the Dollar coming into the week causing the Russian Central Bank to raise its key policy rate from 9.5% to 20.0% on Monday. The government shuddered the stock market for the week and continued its invasion with increasing intensity. Russia reportedly hit the largest nuclear facility in Europe Friday morning, setting it ablaze and sending investors fleeing risk assets. U.S. officials debated ending Russian oil imports which helped send WTI crude over $116 per barrel, the highest price since 2008. Rising energy costs are increasingly expected to compound already-high inflation pressure and drag from real consumption. The economic data were mixed. February’s ISM PMIs were mixed with manufacturing activity rebounding from Omicron but services activity surprisingly weakening. January’s construction spending figures beat expectations but February’s auto sales data showed an abysmal situation limited by almost-zero inventory. The February labor data were solid despite no gains in hourly earnings. Fed Chair Powell testified before the House Financial Services Committee and affirmed that he is likely to propose a 25 bps hike at next week’s meeting. He said a larger hike may become appropriate if inflation does not moderate as officials expect it will. The prospects of rate hikes buoyed shorter yields as longer yields fell, compressing the 2s10s curve another 14 bps to just 24.8 bps. Click here to view the full recap.