by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Good morning! Today, we begin with a discussion about yesterday’s CPI report. Next is an update on the Ukraine war. We then cover economic and policy news, focusing on cryptocurrencies. Last, we go over some international news and our coronavirus coverage.
Wednesday’s disappointing CPI report led to a selloff in risk assets. Investors are concerned that the Fed will become more hawkish as it tries to contain inflation. CPI rose 8.3% from the prior year, slower than the previous month’s report of 8.5%, but above expectations of 8.1%. The rise in CPI was driven primarily by increased energy, food, and shelter prices. The elevated reading suggests that the possibility that inflation will fall by itself is fading. More worrisome is that many of the categories are rising due to supply shortages, and the Fed’s only way to address the issue is by bringing down demand. That being said, we believe conditions still favor commodities, as production constraints will continue to support higher prices. The sharp rise in commodity prices and the selloff in tech equities led Saudi Aramco(SAR, $44.70) to overtake Apple (AAPL, $147.50) as the world’s most valuable company.
- Food prices will likely remain elevated throughout the year. The WADE report is expected to show reduced farm production resulting from drought and the Russian invasion leading to crop shortages.
The Kremlin announced its intentions to annex a southern part of Kherson. This statement is the first sign that Russia intends to occupy regions within Ukraine, a claim denied before invading Ukraine. Following the report, top U.S. defense officials reassured the Senate that it does not believe the conflict will spread beyond Ukraine. U.S. Defense Secretary Lloyd Austin stated Russian President Vladimir Putin does not want a direct war with NATO. However, the officials maintained that the U.S. is prepared to respond in the event of an attack. The comments by defense officials are another sign of the West’s growing confidence that this war will weaken Russia’s capabilities.
- In a sign that the Russian invasion is impacting Europe, Deutsche Bank (DB, $9.73) announced that it might meet its cost target. The bank’s chief stated that supply chain disruptions, currency volatility, and rising inflation might not hurt profitability.
- The EU is struggling to maintain a united front against Russia. Hungary is still negotiating with Brussels over a ban on Russian crude. Meanwhile, Italian President Mario Draghi has stated that European firms will be able to pay for gas in rubles and not violate sanctions. His statement runs afoul of European Union guidance to the contrary. Tensions over dealing with Russian energy continue to be an issue for European countries.
- Russian forces have started siphoning gas from a critical pipeline in Europe running through Ukraine. The disruption of gas flows likely heightened the EU’s energy insecurity.
U.S. economic news and policy
- The slide in crypto continued on Wednesday after the collapse of stablecoin TerraUSD roiled markets. Tether, the world’s largest stablecoin, broke its $1 peg, falling 5% below its target. In response to the decline, the CTO of Tether vowed to maintain its peg and is prepared to sell its government bonds. The loss of confidence in cryptocurrency also pushed bitcoin below $25,000. Investors shifting away from risky assets triggered the selloff in crypto as speculation grows that the Fed will become more hawkish. The crisis in stablecoin has grabbed the attention of regulators who fear that digital assets are becoming integrated into the financial system. As the crisis in stablecoin persists, we suspect the crypto platforms will face greater scrutiny from regulators.
- Shares in cryptocurrency exchange Coinbase sank after it released a disclosure suggesting customers could be on the hook if it files for bankruptcy. However, the CEO has reassured users that the exchange is not at risk of default. The concerns come after investors fled risky assets due to rising interest rates and deteriorating financial conditions.
- The Dallas Fed has named New York Fed staffer Lorie Logan its next President. She will fill the seat vacated by Robert Kaplan, following concerns over his trading activity. Before accepting the position, Logan managed the Federal Reserve Bank of New York’s massive holdings of securities and cash.
- Wednesday, the Senate confirmed economist Philip Jefferson as a governor of the Federal Reserve Board; Jefferson will have a vote on Fed policy.
- The U.S. economic framework is drawing interest from Indo-Pacific countries. Vietnam, Korea, Australia, Japan and New Zealand have all expressed interest in joining the pact. Although the state goal of the framework is to create more stable supply chains, we suspect it has more to do with U.S. aims of isolating China by building ties with its Indo-Pacific neighbors. The framework still lacks detail as the Biden administration is trying to create an agreement that likely won’t require congressional approval.
- After meeting with President Biden, Italian President Mario Draghi proposed creating a cartel of oil consumers. The proposal would have countries come together to pressure oil suppliers to boost production, or consumers would make purchases elsewhere. Governments attempted this idea in 1973 after the Arab oil embargo; however, it was not successful. The most significant obstacle the cartel faces is getting everyone on board. The proposal suggests the West is growing weary of OPEC, which could lead to friction in the future.
- Premier Li Keqiang has urged the government to implement additional stimulus to preserve economic growth. The Chinese economy is slowing due to the reimposition of lockdowns and a property meltdown. To help stimulate growth, Beijing announced subsidies for renewable energy, delays to student debt payments, and promoted the use of REITS to boost infrastructure spending.
- The U.K. and EU continue to wrestle over the North Ireland Protocol. Brussels threatened to retaliate if London followed through on its threat to take unilateral action and scrap the clause. The two sides created the North Ireland Protocol to avoid imposing a hard border between Ireland and North Ireland following Brexit. The agreement allows goods traded from the U.K. to go through checks, sparking outrage in Northern Ireland among loyalists to the Crown, who fear possible reunification with Ireland. A rift between the EU and the U.K. over the protocol could potentially pave the way for a trade war.
- The Hong Kong crackdown is still underway following the election of Hong Kong leader Johnny Lee. National security forces locked up Cardinal Joseph Zen on charges of working with “foreign forces.” The arrest concerned his involvement in a relief fund designed to provide bail and legal aid to pro-democracy protesters.
COVID-19: The number of reported cases is 519,304,197, with 6,257,653 fatalities. In the U.S., there are 82,227,294 confirmed cases with 998,739 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 733,497,155 doses of the vaccine have been distributed, with 580,038,981 doses injected. The number receiving at least one dose is 258,284,015, the number of second doses is 220,287,778, and the number of the third dose is 101,451,546. The FT has a page on global vaccine distribution.
- Kim Jung Un ordered a lockdown in North Korea following the country’s first reported case of COVID-19. Although the government has been rumored by experts from several countries to have COVID-19 cases, its recent announcement suggests the spread has gotten out of control. North Korea does not have access to a vaccine, and there are concerns that the country could become an epicenter of a new variant.
- A study showed that more than half of all early COVID-19 patients still show symptoms. The research suggests we are still learning about the side effects of COVID-19.