The Market Today

Flight To Quality Finds Another Gear As Russia’s Attack Continues

by Craig Dismuke, Dudley Carter


Today’s economic calendar contains some important reports that won’t be released until after markets open. The focus, however, will remain on the highly fluid situation in Ukraine. Reports overnight that Russia continued to bombard major cities in Ukraine were combined with comments from Russia’s defense minister that the operation would continue until the mission is complete. Satellite images showing a massive convoy of Russian military vehicles, which some estimated was 40 miles long, traveling towards Kyiv. The UN reported hundreds of civilian deaths and Western countries continued to discuss new sanctions against the Russian regime.

Manufacturing Surveys Expected to Show February Improvement: At 8:45 a.m. CT, Markit will revise the preliminary estimate of its February Manufacturing PMI. The initial result signaled a stronger-than-expected pick-up up in activity early in the month, with the headline index rising from 55.5 to 57.5 (expected 56.0). At 9 a.m., the ISM will publish its survey of U.S. manufacturers which economists expect will show a small improvement in the headline PMI after a three-month decline. Economists are penciling in a small increase in prices paid and modest moderation in orders and employment.

Construction Spending, Auto Sales and Fedspeak: At 9 a.m., the Census Bureau will release the results for construction spending in January. If results match expectations, the 0.1% gain would match the weakest month for construction spending since a decline last February. Auto sales in February from the various automakers will be released throughout the day. Sales last month were surprisingly strong, rising from 12.44 million to a seven-month high of 15.04 million. Sales are expected to have eased last month to 14.40 million. Atlanta Fed President Bostic and Cleveland Fed President Mester are both scheduled to make remarks at 1 p.m. CT.


Mixed Regional Economic Surveys: Regional surveys released after Monday’s market open painted a mixed picture of economic activity. The MNI Chicago PMI dropped from 65.2 to 56.3, a significant miss relative to the 62.3 expected and the weakest reading since August 2020. Conversely, the Dallas Fed’s regional manufacturing index recovered more than expected, jumping from an 18-month low of 2.0 to a three-month high of 14.0. Activity indicators were mixed while employment declined. Supplier delays improved but inflation indicators jumped higher after a couple of months of improvement.


Stocks Remained Resilient As Tensions Remained High and Fed Expectations Moderated: U.S. equities closed out a volatile February in a surprisingly resilient manner while expectations for Fed tightening took a hit amid the heightened uncertainty. Russia’s military attack intensified over the weekend against a surprisingly strong resistance from Ukrainian forces, military and civilian, and sweeping new sanctions from the West. Among the many new measures announced since last Friday, several countries agreed to kick some Russian banks out of the SWIFT payment system and some froze reserves of Russia’s central bank held outside of the country. Russia didn’t open its stock exchange for trading Monday but some major Russian companies saw their shares decline more than 50% in trading on U.K exchanges. The Ruble crumbled 30% Monday at its low, forcing the central bank to raise its target rate from 9.5% to 20.0%. After some big declines throughout the day, the Nasdaq rallied back late and rose 0.4% while the Dow cut its decline to 0.5% and the S&P 500 slipped just 0.2%. Oil prices gained more than 4% and pushed shares of energy companies higher on a day when most sectors posted declines. Defense companies also jumped sharply and shares of Tesla rose. While equities reversed their early trend, Treasury yields closed near session lows. Fed funds futures nearly priced out a full hike for 2022. Closing market pricing projected a 40% chance of six quarter-point hikes this year, down from a 30% chance of seven hikes. The 2-year yield tumbled in response, falling 13.7 bps to 1.43%, its lowest level since February 9. The 5-year yield shed 14.7 bps to 1.72%, a new low since February 3. The 10-year yield dropped 13.7 bps to 1.83%, the lowest close since February 2.

The flight to quality in global markets kicked into a higher gear on Tuesday as the situation in Ukraine continued to deteriorate with little signs of any progress towards a peaceful resolution (more at the top). Stocks in Asia generally improved and China’s official manufacturing PMI surprised expectations by inching higher and avoiding the forecasted dip into contractionary territory. Other markets, however, clearly reflected the growing concerns. Crude prices gained another 4%, pushing Brent up to $102 per barrel and U.S. WTI briefly above $101 in overnight trading. Russia’s stock market was closed for a second day. Europe’s Stoxx 600 dropped 1.7% and U.S. index futures were 0.7% lower around 7:30 a.m. CT. Investors continued to unwind their most hawkish expectations for Fed policy, with futures flattening out to price in just under five quarter-point hikes this year. Treasury yields declined, led by shorter yields, but trailed notably larger moves across Europe. The 2-year Treasury yield fell 8.0 bps to 1.35% as the 5-year yield slid 7.5 bps to 1.64%. The 10-year yield dropped 5.7 bps to 1.77%, its lowest level since January 21. For comparison, Germany’s 10-year yield was 10.9 bps lower at 0.02% and Italy’s had tumbled 16.1 bps to 1.54%.

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