Energy Prices Soaring as Both Russia and Ukraine Take a Beating

March 3, 2022

The price of West Texas Intermediate crude oil jumped another 3.5% overnight and has risen 52% since the end of 2021.

The dollar jumped 11% overnight against the Russian ruble. Trading on the Russian stock exchange remains suspended. Russia’s banking system is gripped by an extreme liquidity shortage, and the country’s sovereign debt rating has been downgraded to junk status.

None of the financial market pain nor broad global condemnation of Russia’s invasion nor domestic protests by Russians against the war have deterred President Putin from progressively ramping up the intensification of his assault. Ukraine’s big cities are under siege.

A scheduled monetary policy review by the National Bank of Ukraine was postponed. Ukraine’s discount rate had previously been lifted from 6.0% a year ago to 10% after a full percentage point hike at the previous review in January. In a released statement, Governor Shevchenko said that Ukraine’s banking system remains liquid and stable and went on to explain:,

We remain committed to pursuing our inflation-targeting regime. However, now that the forced administrative restrictions are in place, market-based monetary instruments such as the key policy rate no longer play a significant role in the operation of the monetary and FX markets.

Against other currencies overnight, the dollar rose 0.4% against the euro, 0.3% versus the Turkish lira and Mexican peso, and 0.1% against sterling and the Japanese yen but slid 0.2% against the Australian dollar and 0.1% versus the Swiss franc.

In equity market action, share prices closed mostly higher in the Pacific Rim but are down 0.7% in Germany and Italy and 0.6% in Great Britain.

Ten-year sovereign debt yields rose overnight by eight basis points in the U.K., six bps in Italy, five bps in France, four bps in Japan and Germany, but are holding steady in the United States.

From an overnight high of $116,57, the price of WTI oil has fallen back below $110 to a net 1.0% decline currently, and the cost of a Bitcoin is down 0.5% as well.

Published minutes from the European Central Bank policy review in early February declare that “compared with the assessment in December, upside risks to the inflation outlook had increased, particularly in the near term. As the increase in inflation was becoming longer-lasting than initially expected, it was remarked that the Governing Council should avoid characterizing inflation developments as temporary or transitory and instead stress its assessment that inflation was expected to decline in the course of the year. Compared with December the outlook had changed and the likelihood of seeing inflation rates below 2% in 2023 had decreased significantly.”

Fed Chairman Powell will be reprising yesterday’s Humphrey-Hawkins testimony this morning, this time before the Senate Banking Committee. Powell seemingly favors a 25-basis point rate hike at this month’s meeting.

Bank Negara Malaysia officials left their overnight policy rate unchanged after today’s review. The rate has been at a record low of 1.75% since the fourth rate cut of 2020 in July of that year. The pre-pandemic rate level had been 3.0%. Malaysian CPI inflation fell in January to a 4-month low of 2.3%. Officials identified the conflict between Russia and Ukraine as the main risk going forward to global growth, trade, commodity prices and financial market stability.

Five pretty gruesome inflation data releases happened today.

  • Producer prices in Euroland shot up 5.2% on month and by a record 30.6% on year in January. PPI inflation Energy was the main driver, but non-energy producer prices went up 2.2% on month and by 11.6% from a year earlier.
  • In Turkey, CPI inflation accelerated to a 239-month high of 54.4% in February, while PPI inflation jumped 11.5 percentage points into hyperinflationary territory (i.e. above 100%) to a 323-month high of 105.0%.
  • A 0.7% monthly increase in Swiss consumer prices during February was twice as much as predicted and lifted the 12-month CPI change to a 160-month high of 2.2% versus 1.6% in January and -0.5% in February 2021.
  • Belgian producer price inflation accelerated 6.9 percentage points to 37.8%. It was only 3.6% a year earlier.
  • Cypriot consumer price inflation of 6.6% in February was the most since November 1992 and up from negative 1.9% in February 2021.

Consumer confidence in Japan deteriorated last month to its weakest level since May 2021.

South Korean real GDP grew 4.0% in 2021, most since 2010.

There were 215k new U.S. jobless insurance claims last week, the fewest in eight weeks.

U.S. factory orders increased by 1.4% in January, twice the expected rise. Both durables and other orders climbed more than 1.0% on month, and overall orders were 15.1% above their year-earlier level.

U.S. labor productivity increased 6.6% at an annualized rate between the third and final quarters of 2021. That pace matched the previous estimate and enabled unit labor cost growth to subside to a quarter-on-quarter 0.9% and a 3.5% 12-month increase.

Thursday also saw the publication of numerous more purchasing manager survey results for February:

  • The Institute of Supply Management’s U.S. non-manufacturing PMI survey produced a shocking drop of 4.8 index points to 55.1, defying expectations of a slight improvement. The index peaked in November at 69.1. The survey also reflected rapid inflation.
  • The IHS-compiled U.S. services¬† and composite PMI readings, by contrast, rebounded to a 2-month highs, reflecting diminishing Covid restrictions.
  • Euroland‘s services PMI score, 55.5, was lower than the preliminary estimate but still at a 3-month high. Likewise, the composite euro area PMI swung from an 11-month low of 52.3 in January to a 5-month high of 55.5 in February. The outlook is worrisome, however, because the inflation component was already at a record high and increasingly forcing the ECB previous desire to act with patience, and the invasion of Ukraine inserts a huge new depressant into the picture.
  • China’s services PMI fell to a 6-month low and, at 50.4, conveys near stagnation. China’s composite PMI matched January’s 5-month low score of 50.1.
  • Japan’s composite PMI dropped to a 20-month low of 45.8 from 48.8 in January and 52.5 in December. The services PMI for Japan’s economy was at a 6-month low of 44.2.
  • From Russia, the good PMI news was 7-month reading in both its composite and service sector surveys. The bad news is that Western sanctions against Russia are sending current conditions and future prospects into a tailspin.
  • Australia‘s IHS-compiled composite and service-sector PMI readings of 56.6 and 57.4 represent 8- and 9-month highs. Inflation climbed to a record high, but sentiment about the one-year growth outlook improved. Australia’s AIG-compiled construction PMI rebounded smartly as Covid restrictions receded, printing at a 2-month high of 53.4 after diving to 45.9 in the December-January period.
  • Sweden’s composite PMI remained strong with an above-60 reading but, at 65.3, conveyed the slowest rate of positive growth in six months.
  • Brazil‘s manufacturing purchasing managers index was below the 50 level for a fourth straight month. That level separates expansion from contraction, but the shortfall from 50 was tiny for the reading of 49.6.
  • Hong Kong‘s private PMI slumped six index points to a 22-month low of 42.9 in February. Hong Kong is reeling from China-imposed severe restrictions against social activities.
  • Singapore‘s manufacturing PMI slid 0.4 points to a 6-month low of 50.2.
  • Lebanon‘s private PMI rose to an 8-month high of 47.5.
  • The non-oil purchasing manager indices of Saudi Arabia (56.2), Egypt (48.1), and the United Arab Emirates (54.8) rose to 2-, 3-, and 2-month highs.

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

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