Equities entered the new week on shaky footing, as risk sentiment labored under the shadow of war, inflation and imminent Fed tightening.
I’d suggest February’s CPI report, due Thursday, will take a backseat to the conflict in eastern Europe, but that wouldn’t be quite accurate. The war threatens to exacerbate inflation, so if anything, the update on US consumer prices is now even more important.
Any deceleration may be dismissed as old news considering the surge in commodity prices, while a hotter-than-expected print would suggest the situation wasn’t abating even before things spiraled totally out of control in Ukraine. Consensus is looking for 7.9% on the headline and 6.4% on core (figure below).
The Fed is in a self-imposed media blackout prior to the March FOMC meeting, so barring some manner of funding market meltdown or Russia-related credit “event,” traders won’t hear from monetary policymakers in the US.
But expect to hear plenty from politicians and government officials, and that’s where the headline risk resides. Antony Blinken on Sunday told CNN the US and Europe are now “very actively” considering a ban on Russian oil imports. Putin is already facing a buyers’ strike for Russian energy. Brent surged to $139 in early trading on embargo fears (figure below).
Average gas prices in the US are above $4 a gallon for the first time since 2008, and just 10 cents shy of the all-time record. In a press release, GasBuddy cited “the Russian war on Ukraine” and international sanctions which have “cripple[d] Russia’s ability to export crude oil, spiking gas prices by nearly 41 cents in the last seven days alone.”
Russia continued to grapple with an onslaught of corporate bans. On Sunday, American Express followed Visa and Mastercard in suspending operations in the country. “In light of Russia’s ongoing, unjustified attack on the people of Ukraine, American Express is suspending all operations in Russia,” the company said, adding that,
Globally issued American Express cards will no longer work at merchants or ATMs in Russia. Additionally, cards issued locally in Russia by Russian banks will no longer work outside of the country on the American Express global network. We are also suspending all business operations in Belarus. This is in addition to the previous steps we have taken, which include halting our relationships with banks in Russia impacted by the US and international government sanctions.
For its part, Netflix shut down in Russia citing “the circumstances on the ground.” No new subscribers will be permitted to sign up and as of Sunday evening, it wasn’t clear what would become of existing subscriptions. TikTok suspended livestreaming citing the Kremlin’s “fake news” laws. “We have no choice,” the company remarked, in a tweet.
Russian police arrested some 5,000 anti-war demonstrators on Sunday, bringing the total to more than 13,000 since late last month.
The IAEA, meanwhile, warned that the Zaporizhzhia nuclear plant, which Russia shelled and commandeered last week, is now being managed by the Russian military commander whose forces seized the site. “Any action of plant management including measures related to the technical operation of the six reactor units requires prior approval by the Russian commander,” an alarmed Rafael Mariano Grossi said Sunday, adding that “the Russian forces at the site have switched off some mobile networks and the internet so that reliable information from the site cannot be obtained through the normal channels of communication.”
This all comes as the Biden administration gave the “green light” to Poland to send warplanes to Volodymyr Zelenskiy. “That gets the green light,” Blinken told CBS. “In fact, we’re talking with our Polish friends right now about what we might be able to do to backfill their needs if in fact they choose to provide these fighter jets to the Ukrainians.”
Obviously, it’s impossible for market participants — carbon-based or otherwise — to process all of this, but suffice to say the overarching theme in the new week will be the impact of the war on price pressures and the read-through of that for monetary policy. Just as the latest US CPI print crosses on Thursday, market participants will need to digest a fresh ECB statement and forecast revisions.
Recall that Christine Lagarde pivoted hawkish at February’s meeting, ostensibly setting up the first baby steps towards normalization. Since then, eurozone inflation printed yet another record high (figure below).
However, the war has upended the best laid plans. “Given that the cut-off for the ECB’s staff projections was several weeks ago, any new inflation forecasts can be thrown into the waste paper bin as they are outdated,” ING’s Carsten Brzeski wrote. “The new uncertainty, as well as the direct economic implications of the war, are still hard to model [and] the risk of stagflation has clearly increased, complicating the ECB’s dilemma,” he added. “No one can seriously expect the ECB to start normalizing monetary policy at such a moment of high uncertainty.”
In short: Everything will now be contextualized via the war. “In the week ahead, the primary driver will be developments in Ukraine,” BMO’s Ian Lyngen and Ben Jeffery wrote. “The Russian invasion continues, and the global growth outlook has been materially damaged as a result of the balance of risks,” they added, before noting that “investors’ willingness to buy the Treasury market into the payrolls report and extend the bid in the wake of an extremely strong NFP showing of +678,000 jobs is that it is abundantly clear that geopolitics is the only factor that matters at this particular moment.”
Also on deck stateside in the new week: NFIB, JOLTS, the preliminary read on University of Michigan sentiment for March and supply (3s, 10s and a long-bond auction).
I give Putin a month. He can’t slaughter 40 million people in a month. He can’t expect everyone else in the world to accept his actions or look the other way. On the contrary.
Putin will never allow those soldiers to come home. Nothing short of China will stop this.
I wonder what Putin’s “Plan B” for dividing the West looks like?
Economic war of attrition? (…I can hold out with a suffering populace longer than you guys can) ???
Here’s one, what if Russia loses the conflict in ukraine. Not in the long term but I’m the coming days/weeks. What does a cornered Putin look like/act like?
I see what you’re driving at, but can’t envision an outright military “loss” within the next few weeks. Although stalled and sloppy and likely in need of a new approach, I don’t see how the Russian forces could be “pushed back” or completely choked off with respect to reinforcements or supplies. (but stalemate is certainly possible)
No military expert so I’ll ask. Does the amount of drones (or Polish planes) make a difference?
I was also reading contrary statements re. Russian aerial superiority. Someone was saying the Russian air force had been a non factor. They don’t dare fly high b/c of AA/CAD and flying low mean they can be targeted with Stingers.
OTOH, the Ukrainians were desperate to get a no fly zone decreed and enforced by NATO, they keep begging for planes. So clearly they seem concerned by Russian planes. And they should know.
So what’s going on there?
The bond market is telling you this is going to be a deflationary shock. Oil and commodity prices are telling you that this economic cycle is long in the tooth. Putin and his Belarus buddy are in deep trouble.
“Here Comes That Sinking Feeling”, by the Eurythmics, is my choice for music while watching the European index components fall like flaming red stars under a waxing new moon in this ominous cold, cold, desert night.
Look there falls ING through the black yonder! Damn that was to close for comfort! Will have to go see what’s left in the crater come morn. Whoa! Look there The Financial Services are really putting on meteor show!
Are there enough fools left to rush in, where angels fear to tread, this time to bounce the cat again before the close or on the next session? Maybe, but you’d think being a financial piñata must get old eventually.
Guess I’ll go look in on the Bitcoin bait before calling it an early one…. Oh Shiba baby beat me with a Chainlink till it bleeds! Hurts so good! Beat me till my body is a black and blue Polkadot, then, let’s Uniswap positions Shiba my sadomasochistic Queen! Hubba, Hubba, Hubba! … SSDD.
A session in the life of a bit coin trader at http://www.youtube.com/watch?v=4tXC05EkrCk
There’s a case to be made for demand destruction, wit spiking oil prices. Many people are adjusting their consumption behavior as prices skyrocket. Ultimately that decreased consumption in normal circumstances results in supply increases, but going forward, this situation is almost unprecedented and highly unpredictable.
I assume bonds are primarily adjusting to a flight to safety and also sensing decreased global growth, but that risk rebalancing seems entirely offset by oil shocks that will spill into everything.
The backdrop of instability will cause geopolitical hedging to be increasingly risky.
In terms of deflation or a recession related to housing, I see an all cash market ahead, slower price appreciation, but far higher demand and far greater upward movement. The demand for secure housing will be supercharged
In addition, where does one house 100 million refugees? The instability hasn’t started…
“In the past decade, the global refugee population has more than doubled. According to the UNHCR, 82.4 million people around the world have been forced to flee their homes”
Ain’t that the way it goes. When Politics finally gets around to moving markets with it’s tipping point nudge over the edge things always accelerate faster than anybody ever expected…. Dividend returns are starting to sing their siren songs in value traps, but, one of war’s (the real deal type of war that is) first victims is dividends. With the dividend damage worsening the nearer a stock’s proximity to the mayhem as the C-suite begins to build their ‘war-chests.’ I suppose, with the ‘normal’ smaller scale skirmishes that would be good news for US dividend stocks (VIG and VYM are still holding up fairly well last time I looked) except for the fact any serious response to the March of the Axis Powers requires direct and immediate involvement of the US…. Thing is Putin has demonstrated a willingness to weaponize everything since ~2004. Every agreement, law, or treaty, supposedly binding or not, has been weaponized against the opposing signatories by Putin at this point. The latest stunning example is Putin’s claims he wants to open safe corridors for refugees. Then, within a few days it is revealed all routes only lead to Russia! Presumably gulags. There is not a word, the now useless language lawyers can draw up on fancy parchment, that Putin won’t weaponize against the fools that think ink matters more than blood at this point.