Baker Market Update – wk220304

Markets have a lot to digest this week, but geopolitics is front and center. It’s hard to know exactly how the situation in Ukraine will play out, but for now it’s extremely dangerous and that fact is being reflected in financial markets behavior. The news last night that Russian invasion forces had attacked and seized Europe’s biggest nuclear power plant sent shockwaves throughout the globe, pushed money into safe haven assets like gold and US Treasuries, and triggered a massive surge in commodities prices. Catastrophe was avoided for now, but the event raises fears of what may come next in the conflict. Meanwhile, Fed Chairman Powell testified to both houses of Congress this week, largely reiterating his intention to stay on task and begin removing stimulus with a liftoff at the end of the month. Powell said he’s inclined to start with a 25bps hike and make several additional moves as the year progresses. In light of the geopolitical situation, he stressed that they would be “nimble” and base their decisions on data and conditions as they develop. Post-testimony, markets anticipate a total of five 25bps rate hikes this year, then possibly two more in 2023. As the price of crude oil soars well above $110 a barrel, consumer prices will remain elevated for longer than previously expected, but the Fed also needs to be mindful of the potential negative impact on the real economy. It’s a real tough situation for Powell and the FOMC. They cannot ignore inflation, but the steadily flattening yield curve is flashing a clear warning to the Fed that if they move too fast, they’ll derail economic growth and potentially risk a recession. Right now, the 10yr T-Note yield sits at 1.74% and the 2yr at 1.45%… a 29bps spread.

This morning the labor department released a stronger than expected jobs report showing a 678K gain in non-farm payrolls, upward revisions to prior months, a larger than expected drop in the unemployment rate to 3.8%, and signs of moderating wage inflation. All of this has to be welcome to the Fed, especially the wage data which showed the annual rate dropping to 5.1% from 5.7%. The composition of payrolls gains was broad based, so most of the deceleration appears to reflect a genuine easing of pay pressures. The labor force participation rate ticked up a bit higher than expected, and survey data suggests that labor shortages may be levelling off. All good news for the Fed. Earlier in the week we got a stream of data including ISM manufacturing, durable goods orders, and capital expenditures, all of which came in largely as expected. Next week we’ll see the latest release of consumer price inflation and consumer sentiment data among other things. The NCAA basketball tournament won’t start for a couple of weeks. Meanwhile, March Madness simply describes a certain Russian dictator.

Crude Oil Futures: 2021 – Today

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