Inflation, and the Fed’s likely reaction to it, remains in focus this week. March’s Consumer Price Index, which came out this morning, was up 8.5% year over year, slightly higher than consensus expectations. This marked the highest rate of increase since 1981, topping the 12-month advance of 7.9% registered in February. Indeed, White House press secretary Jen Psaki warned yesterday that the March CPI was expected to be “extraordinarily elevated due to Putin’s price hike.” Reflecting the disruptions in the food and energy markets, there was a big difference between the core figure of 6.5% (which excludes food and energy) and the headline number (which includes all prices). A good part of that was driven by a 32% jump in energy prices post Russia’s invasion. Although President Biden authorized the release of about one million barrels of oil a day from the Strategic Reserve, gasoline prices have only eased about 5% since peaking on March 11th.
Continued strength in the U.S. economy, tight labor market conditions, rising commodity and food prices, and the ongoing war between Russia and Ukraine all suggest the Federal Reserve will have to act aggressively. However, the lead bank faces the difficult challenge of not going too far too fast, thereby stalling the economic recovery. Notably, 10-year Treasury yields exceeded 2.79% yesterday for the first time in more than three years.
Meanwhile, Ukraine and Russia have been gearing up what will likely be an escalation in fighting over the former’s eastern region. European leaders continue to discuss banning Russian oil imports, though Germany and Hungary remain set against the idea. Regardless of what actions are taken, petroleum prices are likely to remain elevated.
Altogether, the Dow Jones Industrials ended Monday’s session down 413 points, or 1.2%, while the broader S&P 500 lost 75 points (1.7%) and the tech-heavy NASDAQ slid 299 points, or 2.2%; with investors bailing out of growth stocks in the wake of rising interest rates, the NASDAQ has fallen 17% from its all-time high last November. All of the major market sectors lost ground for the day yesterday, with the largest declines coming from energy (- 3.1%), technology (-2.6%), and healthcare stocks (-2.0%). Industrials sustained the smallest losses, shedding less than one-third of a percentage point. Meanwhile, continued COVID-19 lockdowns in China stoked fears of further global supply-chain bottlenecks. As a result, oil prices fell 4%, with West Texas Intermediate Crude falling to about $94.30 a barrel.
U.S. stock futures jumped in the wake of this morning’s inflation report, and are now pointing to a positive open when trading begins. Elsewhere, Asian markets were mixed overnight, and stocks in Europe are modestly in the red. West Texas Intermediate Crude Oil is up 3.9%, to around $98.00 a barrel.
Looking ahead to the rest of the week, Thursday will bring the latest figures on initial and continuing jobless claims, retail sales for March, and more. Meanwhile, earnings season moves into higher gear with JPMorgan Chase (JPM) reporting on Wednesday, followed by Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) and Wells Fargo (WFC) on Thursday.
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
