Despite some good economic news this week, markets appear to be immersed in the Ukraine-Russia conflict. A good example was this morning's strong jobs report which didn't seem to phase the market (which we'll address why later). To top that off, the current U.S. administration seems very much out of touch with how the conflict will affect the U.S. economy. A great movie from the 1980s that makes me laugh, but also seems apropros to the current situation, is the movie "Spies Like Us."
Chevy Chase and Dan Aykroyd play two bumbling government employees who think they are U.S. spies discover later that they are only decoys. Two great scenes from the movie are the test scene (where the two are trying to get into the spy agency) and the interrogation scene (where Chase's character is questioned about why he is in Russia). I feel like the administration is about as adept at handling the Ukraine-Russia conflict as Chase & Aykroyd. It's been a busy week, so let's get to it...
Ukraine Crisis or Commodity Crisis? We're previously discussed how Ukraine is rich in several commodities (click here to access a previous blog). Obviously, a commodity crisis pales in comparison to what the Ukranian people are going through in their home country. However, for the rest of the world, and for those of us here domestically, oil is changing the market dynamic as I type this blog post.
The U.S. accounts for approximately 20% of global oil production - Russian accounts for 11%. According to the U.S. Energy Information Administration, about 7% of U.S. oil imports come from Russia. Had we finished the proposed Keystone pipeline (click here to see previous post) that would account for roughly 800,000 additional barrels per day, which would dwarf the 72.6 million barrels per year the U.S. purchases from Russia. With the disruption in Europe from the crisis, the price of Crude Oil has risen 19% this week, and the price started the week at $97/barrel!
The IEA announced 60 million barrels release from global stockpiles, however, it's worth noting this has typically had little impact on oil prices. The correlation between increasing oil supplies from the strategic reserve is so poor that is has actually had the opposite effect. Meanwhile, OPEC+ is maintaining its current pace of oil production.
Now the White House is considering banning imports of Russian oil - which we already stated was about 7% of U.S. oil imports - without increasing oil production here domestically. This would likely increase the price of oil to $200/barrel, according to Pioneer Resources CEO, Scott Sheffield. This is why markets are uneasy.
Good News On The Economy. The economic releases were positive overall this week. The manufacturing data was strong from both the Dallas Fed and the ISM. Month-over-month improvement was solid. The Fed's Beige Book showed moderate economic growth over the past 6 weeks. On the inflationary front, Unit Labor Costs increased almost 1% for the 4th quarter, which has been reflected in the PPI numbers of late. This morning's Jobs Report was strong, overall, as the market was expecting only 400,000 jobs added in February, but 678,000 new jobs were added instead.
The Unemployment Rate ticked down form 4% in January to 3.9% in February. However, it was not all rays and sunshine, as Average Hourly Earnings did not increase at all in February. That means the nearly 2% gap between CPI (inflation) and Wages is likely to continue if CPI marches higher when we get the February print. The market yawned at the jobs number, perhaps because it gives the Fed room to hike rates in this geopolitical environment. The S&P 500 was down more than 1% at one point today, only to rise at the end of the day to finish down only 0.3% for the day. Despite all of the volatility this week the S&P 500 was down only 0.6% for the week.
Last week, the probability of a Fed 50 basis point hike later this month was almost 10%. Now, it appears to be off the table entirely, if the futures are any indication. Now, there's even a 6% chance the Fed doesn't hike at all.
In Europe, the ECB has been reluctant to respond to the crisis and looks to punt changes to monetary policy until the latter half of 2022. If the Fed were to pause and not hike rates later this month, markets might respond with temporary "hurrahs," but the long game would be uncertain as inflation does not appear to be going anywhere but higher. Expect more volatility in equity markets until there is some kind of resolution or peace in Europe.