The Market Today

Rising Oil Prices Hammer Sentiment

by Craig Dismuke, Dudley Carter


Inflation Continues to Hit Small Businesses: Small business sentiment declined 1.4 points in February to 95.7, the second-lowest monthly reading since early 2020. The details of the report were broadly weaker.  Respondents planning to increase employment fell 7 pts.  Those planning to make capital outlays dropped 2 pts.  Those planning to increase their inventories fell 4 pts to net +1%, still positive but the bulk of the inventory turnaround increasingly appears to have already occurred. Respondents expecting real sales to increase fell 3 pts. According to NFIB’S Chief Economist Bill Dunkelberg, “Inflation continues to be a problem on Main Street, leading more owners to raise selling prices again in February.” The number of respondents saying they are raising prices rose 7 points to net +68%, the highest level in 48 years.

Record-High Trade Deficit to Weigh on GDP: The January trade balance data showed the monthly deficit jumping from $82.0b to $89.7b, the largest monthly deficit on record.  Imports rose 1.2% while exports fell 1.7%.  Starting the quarter with a larger trade deficit than expected will drag 1Q GDP trackers perilously closer to showing a quarterly contraction.

All Eyes Remain on Russian Developments: The January wholesale inventories data is scheduled for release at 9:00 a.m. CT.  Reports this morning are that President Biden may announce a ban on Russian oil imports after bipartisan lawmakers developed a framework for a plan yesterday.  In contrast, a Russian official threatened that the country could cut off its exports of energy to heavily dependent Europe.  European Union officials will reportedly consider jointly issuing debt to finance defense spending and energy.


Rising Oil Prices Spook Investors: Stocks were hammered yesterday as rising oil prices took a toll on investor sentiment.  WTI crude pulled back from its overnight peak of $130.50 to open yesterday morning near Friday’s closing price of $115 per barrel, but grinded higher throughout the day to close at $120.32 per barrel.  A bipartisan group of legislators reached an agreement on a legislative proposal to ban Russian energy imports.  Other countries did not appear ready to join the ban. Russian energy imports only account for a small fraction of U.S. energy usage, much less than some European and Asian allies.  Regardless, the impact of climbing prices weighed significantly on the outlook for U.S. consumers as well as the broader global economic environment. Bloomberg Economics estimated that oil at $120 per barrel would result in CPI hitting 9% in March or April.  The Dow fell 2.4% (797 points) while the S&P sank 3.0%.  The NASDAQ dropped 3.6%.  Fed funds futures contracts continued to price in the likelihood of a rate hike next week but the January 2023 contract dropped another 3 bps to 1.545%. After falling below 1.67% in overnight trading, the 10-year Treasury yield rebounded to 1.80% by 8:00 a.m. CT before closing the day back down at 1.77%.

Market volatility continued overnight with mixed implications across asset classes. Equities in the Asia-Pacific tumbled following Wall Street’s worst day since October 2020. While the Stoxx Europe 600 was flat just before 7 a.m. CT, it was anything but calm. The index fell as much as 1.0% before flipping into positive territory with a gain as strong as 1.7%, reflecting the volatility that has crippled risk sentiment since the war began. The upward reversal, which accompanied gains for the Euro and European yields, aligned with headlines that the EU was considering joint debt offerings to fund joint investment in energy and defense. U.S. index futures stabilized with the Dow and S&P 500 less than 0.1% higher while the Nasdaq drifted 0.2% lower. Focus remains on the unfathomable upward price shocks across commodities as a result of the war. Although still below Monday’s highest intraday levels, oil prices rose more than 2% to send WTI up near $122 per barrel and push Brent back above $126. Natural gas prices eased and wheat prices inched higher to a new record. Gold crossed back above $2,000 per ounce, a historic level only previously accomplished a handful of times in March 2020. Nickel is the latest market to be severely disrupted by the Ukraine-Russia conflict, with a hard-to-believe surge leading to trading halts. Treasury yields continued to reflect investors’ inflationary fears associated with the rapid ascent in commodity prices, one that has overpowered the downward pull typically associated with geopolitical conflicts and flight-to-quality episodes. The 10-year yield rose 7.7 bps to 1.85% at 7:20 a.m. CT as the 2-year yield added 3.6 bps to 1.59%, earlier rising above 1.62% to set a new high for the cycle.

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