Watching Developments in Ukraine and Awaiting Round One of Fed Chairman Powell’s Semi-Annual Humphrey-Hawkins Testimony

March 2, 2022

The high point of last night’s U.S. State of the Union address were the inspiring remarks about Russia’s invasion of Ukraine and challenge such poses to democracy around the world. On domestic policy issues, President Biden took a deconstructed approach to the bundled package that failed to pass congress, and he cited several broad issues that could or at least should be able to garner bi-partisan support. Biden’s poll numbers are currently low, and only time will tell if the speech laid a basis for improving them.

At 10:00 EST (14:00 GMT), Fed Chairman Powell delivers his semi-annual testimony before the House Financial Services Committee on the state of the U.S. economy and the outlook for monetary policy. He will reprise that testimony tomorrow (March 3) before the Senate Banking Committee. He has much to explain. The Fed’s traditionally highest priority is price stability, and February’s CPI inflation rate of 7.5% was the highest since February 1982, well above its 2% medium-term target, and up from 1.1% just a year earlier.

Russia’s military tactic has been to lay siege to Ukraine’s cities, and starve the government out. Nato’s non-military strategy aims to weaken the Russian economy and restock Ukraine’s munitions without participating directly in the conflict. Both efforts are proving effective.

The weighted DXY dollar index touched a new 20-month high today of 97.83, 9.3% above last May’s 52-week low. Versus Wednesday closing levels, the dollar has risen 0.5% against the yen and 0.2% relative to the euro and Swiss franc, but it has also dipped 0.1% against sterling, 0.3% vis-a-vis the kiwi, 0.4% versus the Australian dollar and 0.5% against the loonie. A flight to safety has fueled recent dollar appreciation.

The dollar climbed 1.3% against the Turkish lira, which has been caught in a mutually reinforcing cycle of accelerating domestic inflation and currency depreciation. The Russian ruble continues to be a major object of Nato pressure. At 111.2, Russia’s currency has plunged 23% since last Thursday.

In equity markets around the world, Japan’s Nikkei and Hong Kong’s Hang Seng index closed down 1.7% and 1.8%. There were also drops of 1.4% in India and 1.0% in Singapore, but European markets show modest gains. So do U.S. futures.

The respite in equities has been associated with rises today in 10-year sovereign debt yields of 14 basis points in Italy, 11 bps in Spain, 8 bps in the U.K., 7 bps in France, 5 bps in Germany and 3 bps in the United States.

At today’s high of $111.4 per barrel, the price of West Texas Intermediate oil was roughly double its 52-week low of $54.05. The daily rise in the price of oil exceeds 6%. The most direct immediate impact on the world economy of the Russian invasion will be through the rising price of energy in a world already grappling with its worst inflation problem in many decades.

Also consistent with this respite theme in financial markets today has been drops of 2.2% in the price of a Bitcoin and 0.9% in the price of gold. This is a very fragile reversal, however, based mainly on the uncertainty of what Fed Chairman Powell will exactly signal.

Preliminary February consumer price data for the euro area out this morning produced a 0.7 percentage point acceleration to a fresh record high of 5.8%. That compares with 0.9% in February 2021. Among individual Euroland members in comparisons of February inflation rates in 2021 and 2022, Germany’s climbed from 1.6% to 5.5%, French inflation rose from 0.8% to 4.1%, Italy’s from 1.0% to 6.2%, Belgium from 0.3% to 9.6%, the Netherlands from 1.9% to 7.2% and Spain from negative 0.1% to +7.5%. This array of changes attests to the global nature of the current inflation, suggesting that no central bank or government leadership was individually in a position to avert the phenomenon caused by the global pandemic and the highly interdependent nature of production supplies.

As for the pandemic, the trends in cases and hospitalizations have fallen considerably. Deaths are down but to a lesser degree. 1,930 U.S. deaths from Covid-19 were reported yesterday alone, which is very close to the 7-day average and enough to push the cumulative death toll above 950,000. Within a month, that number will probably climb above one million people. Meanwhile, the global death number will break above six million milestone much sooner.

Manufacturing purchasing manager indices for South Korea and India reported today improved to 8-month and 2-month highs of 53.8 and 54.9 in February. South Korea also reported on-year increases in January of 6.8% in construction output, 4.5% in retail sales and 4.3% in industrial production.

The latest monthly batch of German jobs data attests to a further tightening of the German labor market with an unexpected dip in the jobless rate and a greater-than-predicted decline in the number of unemployed workers.

Britain’s Nationwide house price index was 12.6% greater than a year earlier in February, its biggest jump since 13.4% recorded last June.

On-year growth Japan’s monetary base, which is the aggregate most directly affected by monetary policy, slowed to a 20-month low of 7.6% in February from 8.4% in January and 15.9% in 2021 as a whole.

Australian GDP growth of 3.4% on quarter during 4Q 2021 exceeded expectations and was the most in five quarters. GDP was 4.2% larger than in the final quarter of 2020. The biggest growth driver last quarter came from personal consumption. The GDP price deflator was unchanged.

Hungarian GDP climbed 2.0% on quarter and 7.1% on year in 4Q 2021 and also advanced 7.1% on average last year.

Austrian CPI inflation jumped nearly a full percentage point in February to a 450-month high of 5.9%.

Filipino producer price inflation of 4.1% in January was the most in 157 months.

Japanese business investment last quarter posted a greater year-on-year increase of 4.3% than had been assumed previously.

The Bank of Canada‘s latest interest rate decision will be revealed at 10:00 EST. An initial 25-basis point rate hike looks likely. The policy rate has been at 0.25% since a trio of 50 basis point cuts were engineered in March 2020.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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