Week in Review: March 11, 2022
March 13, 2022
Recap & Commentary
Markets ended the week lower as fighting in Ukraine showed no signs of abating, and concerns about inflation continued to intensify. After briefly reaching $130/barrel at the start of the week, oil prices declined to end the week at $109, as some of the most extreme concerns about potential energy supply disruptions abated. Interest rates as measured by the 10-Year Treasury yield increased 0.15% over the week, even as equity markets sold off.
February consumer prices inflation data, the highest in 40 years, further reinforced the need for the Federal Reserve to begin raising interest rates. However, the Fed currently finds itself in the unenviable position of having to do so even as the economy was already showing signs of slowing and is now being further pressured by surging commodity prices following the outbreak of fighting in Ukraine. The combination of slowing growth and surging inflation has given rise to the specter of stagflation, a term that many of today’s investors had, until recently, only been exposed to through the reading of history books.
Highlighting the Fed’s current conundrum, markets are expecting the Fed to raise rates by a total of 1.75% before year-end, while at the same time inflation is currently at a 40-year high, and the Atlanta Fed’s closely watched GDPNow forecasting model is calling for 1Q22 gross domestic product growth of just 0.5%.
In an effort to dissuade Russia from continuing its assault on Ukraine, the U.S. enacted additional sanctions including banning the import of Russian oil, gas, and coal. In addition, a number of U.S. companies including Disney, JPMorgan Chase, Coca-Cola, Netflix, and McDonalds ceased their Russian operations. Unfortunately, those collective actions seemingly had no impact, as Russian forces appeared to redouble their assaults on major Ukrainian cities.
Economic Commentary
Inflation accelerated further in February, rising 0.8% from January, and 7.9% from a year ago. Energy prices rose 3.5% in the month, accounting for about one-third of the gain. Before the outbreak of fighting in Ukraine, it was expected that inflation would begin moderating in the second quarter. However, with commodity prices climbing further following the outbreak of fighting, inflation will now likely continue to face upward pressure, at least in the near term. Though average hourly earnings rose 5.1% in February from a year ago on a nominal basis, on an inflation-adjusted basis wages declined 2.6%. On a core basis, excluding volatile food and energy prices, inflation rose 6.4%.
Consumer sentiment fell for a third consecutive month, reaching its lowest level since 2011. Geopolitical tensions were clearly on consumers’ minds as 24% of respondents referenced the fighting in Ukraine. Higher energy prices, and inflation in general are also weighing on consumers as evidenced by one-year inflation expectations which rose 0.5% to 5.4%, the highest level since 1981. On a five-year basis, however, inflation expectation remained unchanged at 3.0%.
February job openings were largely unchanged at 11.3M. The number of people quitting their jobs dipped 3.4% to 4.25M, the lowest level since last October.
Of Note
AT&T and Discovery issued $30B of debt in conjunction with WarnerMedia’s merger with Discovery. The issuance, which was the largest since 2019 and fourth largest ever, was oversubscribed by 3.5x, drawing $106B in orders.
| S&P 500 | -2.9% |
| Small Caps | -1.1% |
| Intl. Developed | 0.4% |
| Intl. Emerging | -5.2% |
| Commodities | -0.5% |
| U.S. Bond Market | -1.8% |
| 10-Year Treas. Yield | 1.88% |
| U.S. Dollar | 0.5% |
| WTI Oil ($/bl) | $109 |
| Gold ($/oz) | $1,992 |
The Week Ahead
- Producer Inflation
- Retail Sales
- Housing Starts
- Existing Home Sales
- Industrial Production
- Weekly Jobless Claims
