Inflation, The Fed, & War Drums
Last week, inflation rose to the higher levels in over 40 years. For the 9th time in last 11 releases, the Consumer Price Index release was higher than analysts expected. Even if they thought it was wrong, you'd think analysts at this point would just add 20-30 basis points on top of their CPI projection in order to not be below the actual number - but, I digress. The January release of inflation stoked fears of a more aggressive rate hiking cycle by the Fed. On Friday, rumors of an "expedited, closed" meeting by the Fed around 11:30 am eastern today had circulated forcing equities lower. If that were not enough, news reports of an "imminent" invasion of Ukraine by Russia were reported around noon on Friday, which sent markets lower by almost another 2%.
We're not completely convinced Russia is about to invade Ukraine. First, on Sunday, Ukrainian President Zelensky invited President Biden to visit the Ukraine this week. These don't seem like the actions of a man preparing for an invasion of his sovereign country. Second, most invasions of this kind do not happen with this much media attention.
They are typically planned in secret and usually catch the world by surprise. Russians, if anything, are extremely calculating and not swayed by members of media. Third, Russia is benefiting greatly from oil priced above $90/barrel. Until recently, oil had been priced below $80/barrel for nearly 5 years. Oil is the country's greatest natural resource and a key bargaining chip. It is unlikely that Russian would potentially ruin a handsome price-point for oil when Europe is so dependent upon the exports from Russia.
Unlike the haze that surrounds Ukraine, inflation is no joke. The last time inflation was this high the Fed Funds Rate was at 11.50%, as opposed to 0-0.25% today. It will be interesting to see if indeed a secret Fed meeting takes place today and if a surprise rate hike is the result. There are four scheduled speaking events this week with four different Fed governors. The Producer Price Index release tomorrow will only add fuel to the fire as 0.5% increase is "expected." Fed policy going forward will likely more closely result a tightrope act.
The rest of the economic news last week did not help matters much. While the Jobless Claims data was good, Consumer Sentiment plummeted in the first preliminary reading for February - pitting sentiment and inflation on opposite paths.
There will be a flurry of economic releases this week, but they may get overlooked among Fed speakers and Ukraine hysteria. Shipping remains a problem and regulations set to go into effect could make the situation worse. Instead of projecting saber rattling, the administration should focus on fixing the problems at the ports, which could reduce the red hot increase in inflation.