Markets Held Hostage

Needless to say, markets will remain hostage to geopolitical news flow in the week ahead.

Hopefully, Vladimir Putin will choose to deescalate. On Sunday, as the West expelled Russian banks from SWIFT and targeted the country’s central bank, he put Russia’s strategic nuclear forces on “higher alert,” even as the Kremlin renewed an overture to send a delegation to Belarus to discuss a cease fire.

Initially, Volodymyr Zelenskiy declined, citing the location. He offered Moscow a long list of alternatives, including Budapest, Istanbul and Warsaw, before ultimately agreeing to talks on the Belarusian-Ukrainian border near the Pripyat River. A delegation departed immediately from Kyiv.

Whatever happens, volatility across assets is likely to persist. As noted here earlier this month, that doesn’t preclude rallies. See last week’s Thursday-Friday surge for example. It just means the risk of large daily swings and head-spinning reversals is elevated.

Top-tier data from the world’s largest economy will greet war-weary market participants. It’s NFP week, and consensus expects 400,000 on the headline (figure below).

Recall that January’s jobs report was an enigma. The strong headline print defied expectations for an Omicron-related slowdown, suggesting the effects of the last COVID wave may show up in February’s NFP. Between inflation developments and the war in eastern Europe, February payrolls will feel woefully stale, especially to the extent economists and investors are expected to discern whether the figures were impacted by a surge in COVID cases that long since abated.

Frankly, it’s tempting to say the February jobs report is as close to irrelevant as NFP reports get. Of course, NFP is never totally irrelevant. It’s arguably the most important macro data point on the planet, but circumstances have conspired to relegate this month’s figures to also-ran status.

“For context, the consensus is for a headline NFP print of +400k and a drop in the unemployment rate below 4.0% for only the second time since the pandemic began [but] given the series of revisions and the impact of the seasonals that contributed to the impressive +467k January payrolls gain, it goes without saying that there are wide error bands for estimates of the official BLS data,” BMO’s Ian Lyngen and Ben Jeffery said, adding that there’s “nothing to suggest that even a dismal jobs report would be sufficient to derail the FOMC’s plans to hike rates on March 16,” even as geopolitical events “have made a 50bps liftoff far less likely.”

More germane (maybe) is Jerome Powell’s Congressional testimony on Wednesday and Thursday. Traders will also hear from Bostic (twice), Evans, Williams and Bullard this week, the last opportunity for officials to signal the market ahead of the FOMC’s self-imposed pre-meeting blackout.

The Ukraine conflict materially raised the odds of a stagflationary outcome for the US economy (figure on the left, below), and flat curves this early in the cycle are foreboding. The 2s10s was inside 40bps at one juncture last week (figure on the right).

The Fed can point to relatively subdued longer-term inflation expectations, both market-based and otherwise, in suggesting the situation isn’t on the brink of getting out of control. Nevertheless, the current conjuncture is nobody’s idea of acceptable.

In all likelihood, February’s jobs report will show wage growth remains very hot, and that’ll fan the flames vis-à-vis wage-price spiral warnings. Only now, there’s a risk commodity prices rise so rapidly that consumers simply can’t afford what they need without cutting back on most discretionary spending, a highly undesirable outcome for an economy that relies on a spendthrift mentality.

In addition to payrolls, this week brings the usual week-one ISM prints, as well as factory orders and a smattering of additional data.

The market mood will be determined by developments in Ukraine. If there’s progress there, risk assets may be more forgiving when it comes to hawkish Fed rhetoric and/or any kind of adverse development on the data front. The sheer gravity of the crisis in eastern Europe probably rules out any kind of “bad news is good news” dynamic. No one is going to argue that nuclear war is desirable if it means the Fed only hikes five times in 2022 instead of six.