The Market Today

Investors Take Cover as Russia Invades Ukraine

by Craig Dismuke, Dudley Carter


Incursion Turns into Invasion: The Russian incursion into Ukraine escalated into an overt invasion overnight with reports of Russian attacks broadly across the country, beyond just the Donbas region.  Additionally, media reported troops crossing the Ukrainian border from Belarus affirming fears of a worst-case scenario. With these developments, Russia’s objective appears broader than the Crimean incursion in 2014, which resulted in short-lived U.S. market volatility and an indiscernible economic impact.

U.S. Economic Concerns: Uncertain today is the global response. President Biden indicated he will announce a response this afternoon, expected to be sweeping economic sanctions in conjunction with other G7 nations. Barring escalation to U.S. military involvement, the most acute economic impact for the U.S. is expected to be additional inflation pressure, particularly from energy costs. Russia is the third-largest oil producer in the world and the second-largest exporter. Oil makes up the largest U.S. import from Russia.  Secondarily, the resulting sanctions on trade are likely to hit G7 countries’ growth, reducing the global growth impulse which was expected to be a tailwind for the U.S. economy this year.

Monetary Policy Implications: As it relates to monetary policy, the apparent severity of the invasion will add to economic uncertainty that appeared to just be easing following the Omicron wave. However, rising 5-year TIPs-implied inflation breakevens show that investors perceive the invasion will make inflation concerns more pressing in the short term.  Historical precedent is mixed as it relates to tightening during periods of geopolitical unrest. The initial response in Fed funds futures show the mixed implications. Futures contracts are still pricing in a first rate hike by March and six hikes by year-end, down from six-and-a-half hikes at yesterday’s close.

Initial Market Response – Global Investors Take Cover: Markets careened into a tailspin around 9 p.m. CT Wednesday evening after Russian President Putin announced that Russia was launching military operations in Ukraine (more above). As reports of explosions in Ukraine followed, oil prices spiked, global stocks and U.S. equity futures tumbled, and Treasury yields strongly reversed their weekly rise. Asian equities closed down around 3% and Europe’s Stoxx 600 was 4.0% lower at 7 a.m. CT, its largest daily decline since June 2020. Russia’s MOEX plunged more than 45% before paring its decline to 32% and the country’s currency was more than 5% weaker against the Dollar. Crude prices were up more than 8% with Brent crude at $105 per barrel, its first triple-digit handle since 2014, and U.S. WTI above $99. Commodities saw large swings more broadly, as British natural gas prices surged 40%, gasoline futures jumped on the back of higher oil, and various agricultural commodities posted strong gains. Gold jumped 3% to its highest level since the summer of 2020. The U.S. Dollar strengthened and Treasury prices rallied sharply in the flight to quality, pushing yields down by double digits across the curve. At 7:30 a.m. CT, the 2-year yield was 9.8 bps lower to 1.50% as the fed funds futures curve flattened out. The 5-year yield had declined 11.5 bps to 1.78% and the 10-year yield was 12.3 bps lower at 1.87%. U.S. equity futures were down by more than 2%. The 3.1% decline for the Nasdaq indicates the index will enter a bear market when trading begins and the Dow’s 2.5% drop signals it will join the S&P 500 in official correction territory. Market volatility is likely to persist as the world awaits the West’s response to the Russian invasion, with new and severe sanctions expected to be announced throughout the day.


Initial Claims Improve More than Expected; Continuing Claims Fall to More Than 50-Year Low: Initial jobless claims for the week ending February 19 fell from 249k to 232k, slightly better than the expected decline to 235k. On a non-seasonally adjusted basis, initial claims fell from 240k to 215k, the lowest level since the week (March 6, 2020) immediately before the COVID-19 outbreak caused the historic spike in claims. Continuing claims declined from 1.588mm to 1.476mm, below expectations of 1.580mm and the lowest level since March 1970. The jobless claims data continue to paint a picture of a tight labor market.

4Q GDP Revised up to 7.0%: 4Q GDP was revised up from 6.9% QoQ, SAAR to 7.0% on a weaker revision to personal consumption, down from 3.3% QoQ SAAR to 3.1%, and a stronger revision to private investment ex. inventories.  Offsetting some of the fractional improvement was a revised-higher price deflator, revised up from 6.9% to 7.1%. We expect growth to slow significantly in 1Q22.

Chicago Fed Index Rises: The Chicago Fed’s National Activity Index rose from +0.07 to +0.69 in January. The CFNAI is an aggregation of 85 different economic variables designed to be an indicator of changes in the overall economic landscape.  For example, when the CFNAI’s three-month average is above +0.70 following an expansion, a period of more rapid inflation is expected to occur.  Indicators of geopolitical unrest are not included.  The 3-month average for the CFNAI inched down to +0.42.

New Home Sales and Fedspeak: New Home Sales are expected to decline 1.2% in January data scheduled for release at 9:00 a.m. CT. The pace of home sales is a focal point now given rapidly rising prices and mortgage rates.  At 10:00 a.m., the Kansas City Fed’s February report on regional manufacturing activity is expected to tick higher.  There are five Fed officials on the tape today: Barkin (8:00 a.m.), Bostic (10:00 a.m.), Mester (11:00 a.m.), Daly (3:00 p.m.), and Waller (7:00 p.m.).


Fed’s Daly Sees March Liftoff, At Least Four 2022 Rate Hikes: San Francisco Fed President Daly, among the most dovish Fed officials but one without a vote on policy this year, said she still expects the Fed to begin raising rates in March, despite the increased geopolitical uncertainty. The economy is performing well, the labor market appears increasingly tight, and inflation remains too high and has broadened out. While that warrants the removal of accommodation, Daly said the pace and path of tightening will be determined by how the data play out for the rest of the year. She did, however, acknowledge that her current forecast is for at least four 25-bp rate increases by the end of the year.


Treasury Yields Continued to Push Higher Even as Equities’ Woes Deepened Amid Elevated Uncertainty: The S&P 500 fell deeper into correction territory and the Nasdaq neared a bear market as opening gains quickly evaporated and a steady slide drove the major indices to close near session lows. The S&P 500 fell 1.8% Wednesday, finishing down nearly 12% from January’s peak and at its lowest level since June. While every sector but energy declined, technology companies remained some of the worst performers. That weakness pushed the Nasdaq to a day’s worst 2.6% tumble, placing the tech-heavy index at its lowest close since May and within earshot of a bear market, down 18.8% from its last record close in November. The treacherous situation in Ukraine remained front and center as equities turned lower on reports of a cyberattack against Ukrainian government websites and banks. Additionally, EU sanctions took effect and the U.S. announced new sanctions targeting the builder of the Nord Stream 2 gas pipeline. Despite the weakness for equities, and potentially piling on, Treasury yields rose again as expectations for significant Fed tightening this year persisted. The 2-year yield rose 2.6 bps to 1.60%, its highest close since December 2019. The 5-year yield added 4.1 bps to 1.90% and the 10-year yield jumped 5.2 bps to 1.99%.

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