On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Investment Strategy Analyst BeiChen Lin discussed the latest inflation numbers from the U.S. and key takeaways from the European Central Bank's (ECB) recent policy meeting. They also provided an update on the war in Ukraine and its impact on global energy markets.
Continuing the trend of recent red-hot inflation readings in the U.S., Ristuben said the Labor Department's consumer price index (CPI) rose by 7.9% in February on a year-over-year basis-the largest increase since January 1982.
"The usual suspects driving the surge in consumer prices were the same ones we've seen the past several months, with energy leading the pack, followed by food and shelter costs," he remarked. Inflationary pressures are likely being exacerbated by the Russian invasion of Ukraine, which has injected significant uncertainty into global energy markets, Ristuben added.
As to how the latest readings could influence U.S. Federal Reserve (FED) policy, Ristuben said a rate hike at the central bank's March 15-16 meeting is essentially a foregone conclusion, noting that Chairman Jerome Powell has been telegraphing an increase in the key lending rate for several weeks. However, in the wake of February's CPI number, markets are now pricing in six interest-rate increases this year, rather than five, he said. "Prior to Russia's attack on Ukraine, that number was actually seven-but markets adjusted their expectations downward in the immediate aftermath of the Feb. 24 invasion," Ristuben explained.
He emphasized that inflation remains a key watchpoint for investors moving forward, particularly as it relates to energy prices. "If WTI (West Texas Intermediate) crude oil prices reach a range of $130-$150 a barrel, macroeconomic expectations may have to be changed," Ristuben remarked.
Turning to the latest news from the ECB, Ristuben said that Europe's central bank caught markets off guard a bit with its March 10 announcement that its bond-purchasing program will conclude in the third quarter of 2022. That end-date is sooner than expected, he explained, adding that the ECB also adjusted its language around potential rate hikes.
"Previously, the bank had said it would increase borrowing costs shortly after ending quantitative easing. Its March 10 statement, however, changed this wording to some time," Ristuben said. This appears to indicate that while the ECB will pull forward the end of its asset-purchasing program, it might not pull forward its timeline for raising rates, he explained.
Ristuben said that Europe's central bank is grappling with the same thorny issues as the U.S. is: high inflation and spiking energy costs. However, because Europe is much more dependent on Russia for natural gas and oil, inflationary pressures in its energy sector are running much hotter than in the U.S., he noted. "The ECB made it clear that it's very concerned about how the war in Ukraine will impact energy prices," Ristuben stated.
Focusing in on the Russia-Ukraine war, Ristuben said that unfortunately, the latest developments suggest the conflict will be prolonged. "It seems very clear that Russian President Vladimir Putin is seeking a regime change in Ukraine, and historically, Putin does what he says he will do," he remarked, noting that Russia's attack on Ukraine is a humanitarian crisis with tragic consequences for millions of people,
In recent days, major index providers have removed Russian holdings from their equity benchmarks, Ristuben said, including FTSE and MSCI. "This is reflective of the fact that these providers see Russian equities as un-investable," he observed. However, Ristuben stressed the importance of understanding that Russia is not a big capital market, and represents just 1.75% of the global economy.
"The real reason for the heightened uncertainty in the broader macroeconomic outlook is due to Russia's status as an energy provider-and this uncertainty has triggered profound levels of volatility in energy markets recently," Ristuben stated. As proof, he cited the dramatic swings in WTI crude oil prices. On March 8, the cost of a barrel of WTI crude spiked to $127, before falling significantly March 9-10 and settling near $106, Ristuben said.
"Given that the danger zone for oil prices and the detrimental impacts they can have on economic growth is between $130-$150 a barrel, $106 sure feels a lot better than $127," he remarked. Ristuben concluded by noting that despite the uncertainty plaguing energy markets, there haven't been any disruptions in supply yet.
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