Fed liftoff isn’t the only thing on the docket in the new week, although it’s obviously the marquee event. Well, liftoff and the war. The war is a marquee event too — a perpetual topic du jour that could deteriorate into the most consequential event of the 21st century at any moment, no small feat considering this century has already foisted a pandemic upon our unsuspecting, and woefully unprepared, species.
The economic data stateside is now both stale and more relevant than ever. On one hand, everything that happened in February is dated by Russia’s decision to invade Ukraine late last month. On the other hand, discerning the trajectory of the US economy in the lead up to Putin’s war is paramount considering the conflict materially raised the odds of the worst case economic outcome (i.e., stagflation).
Retail sales are due Wednesday, just a few hours before the Fed decision. Recall that January’s retail numbers came in much better than expected, a relief considering the ongoing slide in consumer sentiment. Consensus expects a 0.3% MoM gain (figure below) out of the February headline.
The problem is obvious: Consumers are being squeezed at the pump, which likely means less discretionary spending going forward. Throw in surging food prices, and you’re left to ponder an extremely challenging environment for Americans whose wages were already struggling to keep up with inflation.
February’s CPI report showed price pressures continuing to broaden out, with food and energy costs rising even before the impact of Putin’s war. The preliminary read on University of Michigan sentiment for March suggested Americans are now the most pessimistic about their personal finances since the mid-1940s.
The figure on the left (below) bodes extremely ill for consumer psychology, not to mention Democrats in the midterms. Some of the blame can be deflected to Vladimir Putin, but it’s not obvious the “cost of freedom” talking point will resonate considering many American voters are self-centered and Russia isn’t exactly on the verge of annexing Alaska, even if Sarah Palin can see Moscow from her front porch.
The figure on the right (above) suggests Americans are now laser-focused on surging prices for the things they need. Again, that’s a canary.
February’s retail sales numbers should be viewed in that context and with a wary eye towards what March’s numbers might show. “Ahead of retail sales data released before the FOMC we’ll be wary of how higher gas prices last month were already weighing on non-necessity spending (ex-grocery stores, health stores and gasoline stations),” BMO’s Ian Lyngen and Ben Jeffery said, noting that “with prices surging as the energy complex retools to be less reliant on Russian crude, we suspect this dynamic will only become more severe in the coming months.”
Goldman cut their outlook for US growth last week in part due to assumptions about the impact of rising commodity prices on consumers. The bank called it “drags from the war.” Late Friday, David Kostin slashed his S&P target.
On Tuesday, ahead of retail sales and the Fed, the market will be forced to choke down another inflation report. PPI notched a harrowing overshoot in January, and any additional evidence of unabated factory gate inflation would be extremely unwelcome news, as it would suggest pipeline pressure was still building prior to Putin’s offensive (figure below).
Empire manufacturing for March is due at the same time as February’s PPI print. Obviously, a miss there wouldn’t do much to move markets, but it could be an “insult to injury” moment in the event the survey serves up incremental evidence to support the stagflation narrative.
Also on deck: Housing starts, existing home sales and the Philly Fed. Barkin and Bowman speak Friday.
Equities remain vulnerable both to more downside and epic squeezes. Stocks are mostly untradeable, I’d argue. I’d also suggest we haven’t seen anything like capitulation in US shares just yet.
Russian equities, meanwhile, will remain literally untradeable until at least March 21.
The geopolitical news flow in just the last 18 hours has been dizzying enough. Iranian missiles, rumored cease fire agreement, attack west of Lviv, China being asked for equipment, China denying, US warning China about circumventing sanctions, yowza…
With all due respect to the comedic genius of Tina Fey, here is the actual quote from Sara Palin during her first sit down interview after being selected as John McCain’s running mate:
GIBSON: What insight into Russian actions, particularly in the last couple of weeks, does the proximity of the state give you?
PALIN: They’re our next-door neighbors and you can actually see Russia from land here in Alaska, from an island in Alaska.
While the Russian mainland is about 55 miles from the Alaskan mainland, the distance between one particular Russian island and one particular Alaskan island is less than 3 miles.
Listened to a BBC reporter this AM describe his recent drive east to west through the Ukrainian breadbasket villages. The farmers and local mayors the reporter claimed to have interviewed did not appear to be willing to cooperate passively with Russian invaders. Much talk about preparations for resistance. Didn’t sound like the already sown wheat crop was going to be a high priority once the tanks arrive. Probably best to forget about the corn crop for export too. What squirrel rifles and shotguns will accomplish against tanks, mortars, artillery, and missiles remains to be seen, but, we can be fairly certain the Russian’s will be more interested with looting than converting their swords into ploughs and assisting with the wheat harvest. Where will agriculture’s machinery be on the fuel food chain? Not sure the history of invasions for the region over the last century or so give much hope for Ukrainian grain exports this year and possibly far longer depending on the Grim Reaper’s harvest.
After that dire report there were rumors of Russia recruiting Syrian mercenaries to fight in Ukraine. If so, we probably shouldn’t be surprised when uniformed NATO allied boots are ‘recruited’ and equipped. On the whole, the existential free-falling over the tipping point seems to be accelerating on a familiar trajectory.