The Market Today
Markets Remain Focused on Ukraine – Russia
by Craig Dismuke, Dudley Carter
Existing Home Sales and Fedspeak: January’s existing home sales figures are expected to show a 1.3% decline in activity following a 4.6% drop in December. As seen in the housing data already this week, the lack of supply continues to plague the sector. The Leading Index (9:00 a.m.) is expected to increase 0.2%. There are four Fed officials on the calendar today: Evans and Waller (9:45 a.m.), Williams (10:00 a.m.), and Brainard (12:30 p.m.). The latter three are voting members with Williams and Brainard being key leaders. The Fed fund futures-implied odds of a 50 bps hike in March have taken a hit since Wednesday, down from 62% to 36%.
OTHER ECONOMIC NEWS
Bullard Says Fed May Need to Hike Beyond Neutral: St. Louis Fed President Bullard reiterated Thursday that he believes the Fed should hike rates by 100 bps before July and begin shrinking the balance sheet in the second quarter. He is increasingly less confident that inflation will dissipate this year as previously expected and the “minority” that still believe it will have misplaced hopes. “If you wanted to put downward pressure on inflation,” Bullard said, “you’d actually have to get to neutral – go beyond neutral. And I think that’s a major concern of mine – we’re not really in a position to do that right now, but we have to get in a position to do that.” Notably, market expectations that inflation will remain stable over the medium-term are heavily contingent on the Fed tightening policy and the Fed’s credibility is at risk if doesn’t act appropriately to bring inflation back down.
Mester Sees Rate Hikes and MBS Sales Ahead: Cleveland Fed President Mester said again on Thursday that she supports starting the process of raising rates in March. The tightening process is likely to occur faster than last time but said the way forward will be data dependent. If inflation doesn’t show signs of moderating in the months ahead, the Fed will be able to quicken the removal of accommodation in the second half of the year. She also said she supports selling portions of the Fed’s Agency MBS portfolio at some point in the normalization process. In an interesting nugget not typically discussed by officials, Mester said the Fed should stop giving explicit policy forward guidance.
Ukraine-Russia Tensions Rattled Markets Again: After a brief détente, fears of a Russian invasion of Ukraine returned Thursday and rattled global markets. Russia had indicated earlier in the week that it had recalled some troops to their bases after a round of military exercises near the border. Top brass from NATO quickly pushed back against the claim, saying there was yet to be any evidence of a drawdown. Nonetheless, markets had taken some solace in the potential ebbing of geopolitical risk. Early Thursday, however, equities in Europe and the U.S. fell quickly and the Treasury curve flattened lower after top U.S. intelligence officials said Russia had actually increased its troop levels near Ukraine and Russia disclosed that it had expelled a top U.S. diplomat. President Biden later said the probability that Russia will invade Ukraine is “very high.” The renewed tension ratcheted up pressure on U.S. equities, pushing the major indices down steadily throughout the day to close near session lows. The Nasdaq led losses with a 2.9% decline, its third largest of the year and since March 2021. The S&P 500 sold off 2.1%, its second sharpest decline since November 2021. The Dow sank 1.8% in its worst session since November 2021. Oil prices sold off despite the return of risk and Treasury yields were well bid throughout Thursday’s trading session. The 2-year yield closed down 5.5 bps to 1.47% while the 5-year and 10-year yields fell nearly 8 bps to 1.84% and 1.96%, respectively.
A Calmer Start for Friday: Global markets remain uneven on Friday as tensions between Russia and Ukraine continue to simmer. Foreign equities were mixed and U.S. futures recovered despite Russia and Ukraine swapping claims over the last 36 hours that the other fired shots in separate incidents, violating terms of a cease-fire agreement. More optimistic headlines, however, have focused on the announcement of a meeting next week between the top diplomats from the U.S. and Russia. Oil prices continued to pull away from multi-year highs overnight despite persistent Ukraine-Russia uncertainty. There has been speculation in recent days that negotiators are making progress towards a return of the Iranian nuclear deal, which could eventually allow the country to begin pumping and selling its crude abroad again. After a modest recovery overnight, U.S. equity futures fell into negative territory and were at session lows at 7:15 a.m. CT. The S&P 500 was down less than 0.1%. Treasury yields were mixed and little changed before falling to new session lows about the same time. At 7:35 a.m. CT, the 2-year yield was 0.1 bp lower at 1.47% while the 10-year yield had slipped 1.7 bp to 1.94%.