Daily Comment (March 3, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! Today’s report begins with the latest developments of the Ukraine Crisis. We will then go over recent central bank news. Afterward, we will discuss economic and policy updates and conclude with our standard pandemic coverage.


Entering its 8th day, fighting in Ukraine has intensified. The latest reports show that Russia may have seized the provincial capital of Kherson, although Ukrainian officials have denied these accounts. Ukraine’s second-largest city, Kharkiv, continues to be pummeled with a barrage of indiscriminate airstrikes. Meanwhile, Russian troops are reportedly having an easier time moving through the southern part of Ukraine as it tries to take over the country. Despite Russian advances, Ukraine appears to be having some success.  In a battle against Russian Forces, Ukrainian troops recovered a document reportedly showing Moscow planned a 15-day war from February 20 to March 6. The document revealed call signals, an invasion map, and a personnel list. The information could not be independently verified for its accuracy, but a U.S. intelligence report suggested that Russia planned to invade Ukraine after the Beijing Olympics, which concluded on February 20.

The fallout from the invasion appears to be spreading throughout the financial markets. Russian energy firms that have not been sanctioned are finding it hard to find places to sell their products. Even with steep discounts, refineries have reduced or stopped purchasing Russian oil altogether due to concerns that the sector will eventually be sanctioned. Additionally, dockers have expressed an unwillingness to unload the cargo from destinations that may have originally sourced from Russia. The inability to find buyers for Russian products has pushed up commodity prices worldwide. Crude oil is on the verge of surpassing $120 a barrel, wheat prices rose above $11 a bushel, and zinc hit a new record at $4000 a ton. The ceiling for commodities isn’t clear, as Russia’s end game is still unknown.

However, the uncertainty regarding the extent of Russian hostility throughout eastern Europe has already started to impact bond markets. On Thursday, an image showed Belarusian President Alexander Lukashenko standing in front of a map showing a planned invasion into Moldova’s breakaway region of Transnistria. Meanwhile, Russia has threatened Bosnia that it will retaliate if the country attempts to join NATO. The growing instability in Europe has led to an increased demand for U.S. treasuries over the last few weeks. The ten-year U.S. Treasury yield has fallen as much as 30 bps since reaching its two-year high on February 16. This flight to safety has started to gum up the financial plumbing. Treasury traders have failed to follow through on their purchase agreement by the greatest number since the start of the pandemic. Meanwhile, U.K. traders have been forced to use safeguard repo facilities as short-dated gilts are becoming scarcer. Although there doesn’t seem to be a funding crisis, if this problem persists it could force the Federal Reserve to reconsider ending quantitative easing.

Central Bank Policy

  • U.S. economic activity expanded at a moderate to a modest pace in mid-January, according to the Federal Reserve Beige Book. The publication looks at the economic conditions across the 12 Federal Reserve Districts. Despite the expansion of economic activity, many districts reported a temporary slowdown due to heightened absenteeism related to the surge in COVID-19 cases. Additionally, firms have expressed an increased willingness to raise prices as a way to mitigate the impact of rising wages and input prices.
  • The Federal Reserve is expected to hike rates in March, according to Fed Chair Jerome Powell. In a testimony to the U.S. House of Representatives Financial Services Committee, Powell stated the Ukraine situation would not deter another rate hike. Investors responded positively to Powell after he stated he does not favor an increase above 25 bps.

 Economic Policy and News

COVID-19:  The number of reported cases is 441,048,833, with 5,976,554 fatalities.  In the U.S., there are 79,143,885 confirmed cases with 954,519 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 691,012,865 doses of the vaccine have been distributed, with 553,778,476 doses injected.  The number receiving at least one dose is 253,752,684, while the number of second doses is 215,775,839, and the number of the third dose, granting the highest level of immunity, is 94,552,155. The FT has a page on global vaccine distribution.

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