by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Once again, our Comment opens with an update on the Russia-Ukraine war, where the leading news over the next couple of days is likely to be the major allied diplomatic meetings in Europe.  We next review a range of international and U.S. developments with the potential to affect the financial markets today.  We conclude with the latest news on the coronavirus pandemic.

Russia-Ukraine:  Russian invasion forces remain essentially stalled in northern and eastern Ukraine, while the Ukrainian defenders are reportedly mounting modest counterattacks in an effort to push them back or at least disrupt their ongoing resupply efforts.  The Russians appear to be making some progress in consolidating their hold on the country’s southeastern coastline, but vicious street fighting continues in the city of Mariupol.  According to U.S. defense officials, more than 10% of Russia’s invasion troops have been killed or wounded and are no longer in the fight.  To make up for those losses and regain momentum, Russian President Putin appears to be pressuring Belarusian President Lukashenka to throw his troops into the battle.  However, Ukrainian military officials say Lukashenka and the Belarusian military strongly resist that idea, at least for the time being.

• President Biden left yesterday for a summit of NATO leaders in Brussels to be held tomorrow and other allied meetings later in the week.  Reports indicate Ukrainian President Zelensky will address the NATO meeting by video link. U.S. National Security Advisor Sullivan said the agenda items for the meetings would include:
  • Imposing further sanctions on Russia and tightening the existing sanctions, including a possible European ban on importing Russian oil and natural gas, although Germany continues to resist that idea;
  • Beefing up NATO’s military force posture on its eastern flank;
  • Steps to enhance Europe’s energy security and reduce its heavy dependence on Russian gas;
  • Steps to deal with the massive humanitarian crisis touched off by the war, including the mass flow of refugees into western Europe; and,
  • Resolving other prior disputes among the allies that could distract them from dealing with the Russia crisis, such as trade and technology disagreements.
• Separately, Russia’s deputy energy minister said storm damage would reduce oil flows through the Caspian Pipeline Consortium’s pipeline from central Asia to the Black Sea by up to one million barrels per day for the next two months.  The announcement could be a subtle way to warn that Russia could strike back at the U.S. and its allies by shutting off its own energy exports.
  • Underscoring those fears, German regulators have asked its energy utilities to report on their energy needs and prepare plans for a possible cutoff of Russian energy supplies next winter.
  • The more immediate impact from the news is that the threat of one million barrels per day kept off the market has given a significant boost to global oil prices so far today.  Of course, the impact of the war also continues to affect a wide range of other major commodities.

Taiwan:  As Taipei continues to consider the lessons of Russia’s invasion of Ukraine, officials say they may extend compulsory military service beyond the current four months.  Taiwan has been gradually shifting from a conscript military to a volunteer-dominated professional force, but Beijing’s growing pressure against the island it claims as its own, as well as Russia’s invasion of Ukraine, have prompted debate about how to boost civil defense.

United Kingdom:  The February Consumer Price Index was up 6.2% year-over-year, accelerating from the January gain of 5.5% and marking the highest inflation rate since 1992 (see chart immediately below, and the data tables farther down).  The figures illustrate how the current inflation problem is widespread around the world.  The figures also suggest the Bank of England will face pressure to hike interest rates further in the coming months.

United States-United Kingdom:  The U.S. and the U.K. struck a trade accord under which the U.S. will allow the U.K. to ship “historically-based sustainable volumes” of steel and aluminum products to the U.S. without the levies imposed under the former Trump administration, while the U.K. will lift levies on American whiskey, motorcycles, and tobacco.

U.S. Monetary Policy:  Cleveland FRB President Loretta J. Mester yesterday said the Fed would have to raise interest rates many times as it seeks to lower very high levels of inflation.  According to Mester, the benchmark fed funds rate will have to reach 2.5% before the end of this year and even higher in 2023.

• Mester’s year-end target of 2.5% is a bit lower than several other policymakers have suggested, but it still underscores the extent to which the monetary officials are panicked by inflation and are now intent on ratcheting up interest rates aggressively.
• All the same, we continue to suspect their rate hikes will expose financial fragilities and/or an economic slowdown after even a limited number of increases, forcing the Fed to retreat.

Canada:  Prime Minister Trudeau and his center-left Liberal Party struck an agreement in which the leftist New Democratic Party will support his government in key votes until mid-2025.  The deal ensures that the Liberal government, which currently holds only a minority of seats in parliament, will be able to stay in power for at least the next three years.

• Combined, the two parties hold a majority of the seats in parliament.
• Under the agreement, the parties will cooperate in implementing a progressive agenda that focuses on climate change, expanding medical and dental coverage for lower-income Canadians, and delivering more affordable housing.

COVID-19:  Official data show confirmed cases have risen to  474,206,633 worldwide, with 6,099,561 deaths.  In the U.S., confirmed cases rose to 79,803,670, with 973,266 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who are considered fully vaccinated now totals 217,093,232, equal to 65.4% of the total population.

• In the U.S., the seven-day average of people hospitalized with a confirmed or suspected COVID-19 totaled 20,984 yesterday, down 41% from two weeks earlier.  Despite the recent decline in hospitalizations, however, the Omicron mutation’s BA.2 subvariant continues to make gains abroad and is becoming a substantial factor in U.S. infections.  Given BA.2’s greater transmissibility, experts are expecting yet another surge in U.S. cases, hospitalizations, and deaths.
• While multiple studies have found that a fourth vaccine dose offers protection for elderly people and those with health problems, experts have found little evidence to support rolling out a fresh round of jabs more broadly.
• Separately, in a new study, Moderna (MRNA, $186.72) said its vaccine induced robust immune responses in children ages 6 months to 5 years, even though the shot had only modest efficacy against the Omicron variant.  The company said it would seek authorization to use the vaccine for children five years old and younger, one of the last major demographic groups not currently eligible for vaccines.
• Due to Congress’s failure to agree on new pandemic funding, the Biden administration says it has no more money to reimburse hospitals and other healthcare providers for the cost of testing and treating people who lack health insurance.  COVID-19 bills for uninsured patients will now depend on each hospital’s financial-aid policy and their prices, both of which can vary widely from one hospital to another.

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