Monthly Market Update | February 2022

Mar 21 2022 | 10 min

Overview

1. Sanctions imposed on Russia amid Ukraine invasion
2. Fed expected to raise rates in upcoming March Meeting
3. Oil prices breach $100 a barrel for the first time since 2014
4. Inflation in Europe and the U.S. reach record highs
5. Equities decline amid hawkish policy shift
6. Sentiment reach decade-low amid high inflation and negative long-term growth prospect

  1. Policy & Geopolitics

The Fed is on track to raise rates during March meeting

Federal Reserve Chairman Jerome Powell said he would propose a quarter-percentage point rate increase at the central bank’s meeting, set to take place on March 15-16, amid high inflation, strong economic demand and a tight labour market. Although he doesn’t believe a half-percentage-point increase will happen this month, he laid the groundwork for the possibility of the larger increase in the summer. This comes after headline PCE , the Fed’s preferred inflation gauge, rose 6.1% in January from a year earlier, while core PCE rose 5.2% from a year earlier, close to a 40-year high. Powell stated should this strong and high inflation persist, he would be prepared to move more aggressively by raising rates by a half percentage point at one or more meetings later this year, which the Fed hasn’t done since 2000.

The Fed is expected to make “good progress” preparing its plans to shrink its $9 trillion asset portfolio, but they do not expect these plans to be finalized at its upcoming March meeting. This comes following pressure from politicians in the country expressing the Fed should have removed stimulus faster following the approval of the $2 trillion spending program a year ago. Mr. Powell remains confident the labour market is strong enough that the economy should be able to withstand higher rates, following concerns over whether the Fed’s response might backfire, causing a recession without bringing down inflation.

Christine Lagarde, the president of the European Central Bank (ECB), is expected to outline the seriousness of Russia’s invasion on Ukraine on the outlook of the eurozone economy at the March 10 meeting. The ECB is widely expected to postpone any major policy decisions , preferring to maintain as much flexibility as possible while assessing the economic fallout from the war in Ukraine. Inflation is already rising at its fastest rate in the 22-year history of the single currency, and with the disruption to the supply of energy and other commodities going on, inflation is forecasted to sustain that pace. Despite that, Lagarde is expected to take a ‘neutral stance’ on the potential of the ECB raising interest rates this year, neither signaling not ruling it out. 

The West impose sanctions on Russia amid Ukraine invasion

On February 24, President Putin authorized “special military operations” in Ukraine, leading to major Ukrainian cities including Kiev being hit by missile and artillery attacks. This came days after  Putin stated in a TV address that Ukraine was an integral part of Russian history, before deploying troops to two eastern Ukrainian regions, deemed “independent” by the Russian leader. The West responded with a first wave of sanctions with the U.S., Britain and their allies sanctioning Russian Parliament members, banks and other assets, as well as Germany halting the Nord Stream 2 gas pipeline project.

Russia has a significant role in global energy markets and the sanctions imposed have prompted concerns of disruption to energy supplies, with oil prices breaching $100 per barrel for the first time since 2014. The EU is expected to be hit the hardest as they import 41% of their gas from Russia, with natural gas prices surging following the attack. Another major concern is the fall in food exports, as Russia and Ukraine are global wheat and sunflower oil producers. The halt in supply following the closure of Ukrainian ports and the blockage of Russian ships across countries will likely push up food prices, adding pressure to inflation in Europe and the U.S., already at record highs.

Macro Indicators

Latest Jobs Report beats estimates

U.S. unemployment fell slightly in February to 3.8% from 4.0% in January, below estimates of 3.9%. Job growth accelerated in February, posting the biggest monthly gain since July, led by leisure and hospitality. The U.S. economy added 678,000 jobs, beating estimates of 440,000. The number of employed Americans is just 1.14 million below pre-pandemic levels. 10.9 million jobs were open at the end of 2021, a historically high labor shortage of about 1.7 vacancies per available worker. The mid-February results don’t show the impact, if any, of Russia’s late-February invasion of Ukraine and the run-up in oil prices. Wages climbed 5.1% year on year (YoY) in February, down from 5.5% in January. Unemployment in the Euro area was 6.8% in January, down from 7.0% in November and 8.3% in January 2021.Figure 1_ Monthly Unemployment-1

Slower expected U.S. growth amid Russian invasion

IHS Markit expect U.S. GDP growth to slow to 2.5% in 2022 with higher inflation following the Ukraine invasion, 0.4% below the previous forecasts. Personal Consumption Expenditures (PCE), the preferred inflation indicator of the Federal Reserve (the “Fed”) is projected to rise 4.3% this year, 0.7% higher than last month’s forecast. Russia and Ukraine account for 60% and 29% of global sunflower oil and wheat production, respectively, which adds pressure to food prices as supplies are disrupted by sanctions and the closure of Ukrainian ports. Crude oil prices breached the $100/ barrel at the end of February following sanctions on Russia, a major oil and gas supplier. Higher oil prices are expected to reduce U.S. growth by 0.4% in 2022, with almost no effect in 2023 and 2024.

US retail sales rose 3.8% in January, its highest increase in 10 months, amid a surge in purchases of motor vehicles and other goods.

U.S. seasonally adjusted annual home sales rose 6.7% in January to 6.50 million, but were down 2.3% YoY. Buyers may be locking in low interest rates ahead of expected hikes, continuing to improve housing prices.

The US Consumer Price Index (CPI) increased 7.5% YoY in January, its biggest gain in 40 years, beating Wall street estimates. Core CPI, which excludes food and energy, climbed 6.0% YoY in January, also its largest annual growth in 40 years. CPI in the euro area increased 5.1% YoY in January (from 5.0% in December), with energy prices contributing to nearly 30% of that rise.

The IHS Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 57.3 in February from 55.5 in January in the US and fell to 58.2 from 58.7 in the Euro area. Output in the US rose faster amid signs of easing supply chain disruption and the sharpest expansion in new orders since last October.

Sovereign bond yields rise amid higher-than-expected inflation

10-year US Treasury yields breached 2% on February 10 for the first time since August 2019, amid data showing hotter-than-expected price pressures. Yields closed February at 1.83%. Germany’s 10-year bund yields reached 0.31% on February 15, its highest level since 2018, as higher-than-expected US inflation caused traders to ramp up bets of a 0.5% rate hike in March, which caused the sell-off to spill into euro zone bonds. Yields closed February at 0.13%.Figure 2_ US & German 10 Yr Sovereign Bond Yields-1

Financial Markets

Equity markets decline amid hawkish policy shift

The S&P 500, Dow Jones and Nasdaq fell 3.1%, 3.5% and 3.4% in February, respectively. The risk-off sentiment was driven by the potential policy reaction of the Fed to the 40-year high inflation of 7.5% and the surge in oil prices following Russia’s assault on Ukraine.

The STOXX Europe 600 fell 3.4% in February, while the UK FTSE100 fell 0.1% amid fears of escalation in the Ukraine conflict and its effects on commodity supply. Asian equities were mixed, with the Hong Kong Hang Seng index and the Japanese Nikkei 225 Index falling 4.6% and 1.8%, respectively, while the Chinese SSE Composite Index rose 3.0%.

Credit spreads widening

Investment grade spreads widened to 1.30% at the end of February from 1.10% in January as Russia’s invasion of Ukraine dented investor risk appetite, while high-yield spreads ended February at 3.77% from 3.63% in January.

Oil prices surge mid supply concerns

Spot WTI and Brent crude oil prices rose from $89.16 and $92.35 per barrel, respectively, in January to $96.13 and $103.08 at the end of February. Both benchmarks have climbed approximately 48% since the start of December, after the Russian invasion of Ukraine raised concerns over supply disruptions. The International Energy Agency (IEA) agreed to release 60 million barrels of crude, equivalent to less than one day of worldwide consumption, from their reserves to subdue the sharp increase in prices. This only magnified market fears that supply may not cover growing disruptions.Figure 3_ Crude Oil Prices (in US-)-1

OPEC+ continued their plan to increase oil production gradually despite the oil price rally, increasing output in April by 400,000 barrels per day above March’s level.

Energy prices surged in the European Union (EU) before the Ukraine invasion, with strong demand as countries reopened amid a longer-than-expected winter last year. With Russia accounting for 25% of EU oil imports and almost half of its gas, concerns mounted that Russia may restrict supplies in retaliation for sanctions and other measures against them. If Russia were to cut supplies to Europe completely, the gas held in storage in the EU would fall to its lowest for at least a decade in April. Euro Area energy prices in February are expected to rise 31.7% YoY, with further increases expected as the situation unfolds in Ukraine. Figure 4_ Euro Area Energy Prices (% YoY)

US dollar and gold surge, Bitcoin recovers

The US dollar closed February at 96.7 from 96.5 in January. Gold prices rose 6.2% in February, to $1,909, following a stronger dollar and rising US bond yields. Bitcoin rose 12% in February to $43,198.6, but was still 37% below its all-time high of $68,789.6 on November 10.

Sentiment

Consumer sentiment falls to decade-low

The Consumer Sentiment Index of the University of Michigan fell to 62.8 in February from 67.2 in January to its worst level in a decade amid concerns over inflation-induced declines in personal finances, rising interest rates and the long-term prospects of the U.S. economy.

The VIX index rose to 30.15 in February from 24.83 in January, largely due to worries over the pace of interest rate hikes after higher-than-expect inflation data.

The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “Extreme Fear” at 24 as investors flee risky stocks for the safety of bonds. SentimentCOVID-19

The number of COVID-19 cases and deaths fell significantly since their record highs in January.

US COVID-19 cases in February were substantially below the peak of 800,000 daily cases in January, with a seven-day average of 70,000 cases compared to 500,000 at the end of January. As hospitalization cases dropped throughout the country, many state leaders opted to ease their mask and proof-of-vaccination requirements. 65.3% of Americans are fully vaccinated, with 28.7% having been given booster shots.

Daily Cases in Europe have more than halved last month, from some 1.7 million daily cases in late January to around 730,000 at the end of February. Although cases are still high across the continent, most countries are dropping travel restrictions and mandatory testing requirements due to the mildness of Omicron infections.

Southeast Asia remain hit heavily by the Omicron wave, as Hong Kong and Thailand reported record daily cases throughout the month, with the rising death count in the former straining its health infrastructure. Other countries are lifting travel restrictions. Indonesia no longer requires international passengers in Bali to isolate upon arrival. The Philippines will ease movement restrictions and remove capacity limits on most businesses in the capital region.

The Month Ahead

1. Federal Open Market Committee meeting on March 15-16

2. European Central Bank monetary policy meeting on March 10

3. Ongoing monitoring of Russia-Ukraine situation

 

 

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