Morning Report: Rising prices and slower growth

Vital Statistics:

 LastChange
S&P futures4,322-10.2
Oil (WTI)117.161.49
10 year government bond yield 1.79%
30 year fixed rate mortgage 4.04%

Stocks are lower this morning as the war in Ukraine continues. Bonds and MBS are up. US Treasuries are rallying, and the German Bund went negative in the overnight session

Western economies are considering an embargo on Russian oil. Since Russia is the third largest producer of oil behind the US and Saudi Arabia, this will push up prices and compound the inflation issue.

Most of the United States relies on West Texas Intermediate oil, which in theory should be unaffected by events in Russia. The East Coast refineries do get oil from international markets, however that could come from any number of sources. I think Hawaii uses Russian oil, which makes sense geographically. Ramping up production in the US will take some time, and at the moment you cannot raise capital for E&P projects.

It isn’t just oil that is rallying: Base metals like copper, aluminum and zinc are climbing, and wheat is limit up yet again. Take a look at the chart of wheat below. See those flat lines for the past two trading days? That means the contract was limit up. The commodity exchanges put daily limits on how far a price can move. This means that prices would be higher absent these limits.

Rising food prices are being driven by something most of us never think about: fertilizer. Fertilizer prices have tripled over the past year.

Rising markets attract fast money, and you have to imagine institutions investors are raising money for commodity funds hand over fist right now. Which will lead to higher commodity prices going forward.

So, rising commodity prices. What about labor?

The labor economy remains strong, according to Friday’s Employment Situation Report. Nonfarm employment rose 678,000, while the unemployment rate fell to 3.8%. Leisure and hospitality reported the biggest increase in payrolls. Average hourly earnings rose 5.1%.

The Atlanta Fed’s GDP Now estimate sees Q1 growth at 0%.

So what does this all mean with interest rates? My guess is that the Fed is going to increase rates to quell inflation, but with growth hitting the wall, the yield curve will flatten. So we could see a higher Fed Funds rate, but long term rates, such as mortgages could move up much slower. In other words, if the Fed raises the Fed Funds rate 100 basis points this year, I don’t think we will see a 100 basis point increase in mortgage rates.

22 Responses

    • Wapo ran a story saying conservatives were chanting Putin at a rally… I’ll take things that didn’t happen for $200

      Like

      • I can almost believe there were 5 or 10 plants in the audience doing it. Left media conspicuously doesn’t find out who was doing it specifically so conservatives online can’t research them and find out they are all DNC operatives.

        Like

  1. Something worth noting:

    “kara swisher

    Mm-hmm. What’s your worst-case scenario?

    clint watts

    Putin loses. And I don’t like the nuclear discussion right now, because it’s set up on Cold War dogma and classes that I had in the ‘90s. And what I see Russia doing is not what I was taught in school at West Point in 1993. So my worst-case scenario is, Putin is losing. He has problems at home. It could be a Russian coup threat or a populist uprising way beyond the Navalny protest. Soldiers are dying. Maybe 10,000 have died at the 30-day mark. And he says, I’m going to use a tactical nuke to finish this off and bring Kyiv to its knees, Zelensky to the table, and the West to stop barking at me.

    kara swisher

    Wow.

    clint watts

    I find that, in the nuclear discussion, we’re not talking enough about, Putin will not lose. He’s not going to let that happen. And you have a guy who’s isolated, rumors of health risk. Like, maybe he’s sick. If he’s isolated, worried and all that matters to him is his place in history, which is, I’m the one who retook Ukraine, I’m the one who restored Russian greatness, why wouldn’t he use a nuke, whether the West did anything at all?

    kara swisher

    Wow.

    clint watts

    And that’s where I’m most scared, I think, at this point.

    kara swisher

    A tactical nuke.

    clint watts

    Yeah. It would not be this “Day After” movie sort of thing. It would be strategic use of it to win and end the conflict.”

    Like

  2. Totally smart play.

    Like

    • The left is already jawboning the oil companies about prices.

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    • It really is a return to the 1970’s, Nixon and all.

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    • That will work out GREAT.

      That the obvious problems seem invisible to these experts is just mind-boggling to me.

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      • I have underestimated how much ESG investors have infiltrated US companies… I think the left is betting that they can force the oil companies to not raise prices

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        • I think that’s a bad bet. Price controls with big fat loopholes for all the elites won’t go over well with a lot of voters, either.

          And it won’t go over well with lefty companies who start running out of cash.

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        • I think the left figures ESG investors are their ace in the hole. Plus it gives democrats plausible deniability that the left is behind it

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  3. Good piece:

    “The Two Blunders That Caused the Ukraine War
    Robert Service, a leading historian of Russia, says Moscow will win the war but will lose the peace and fail to subjugate Ukraine. How Putin could be deposed.

    By Tunku Varadarajan
    March 4, 2022 1:07 pm ET”

    https://www.wsj.com/articles/cause-ukraine-war-robert-service-moscow-putin-lenin-stalin-history-communism-invasion-kgb-fsb-11646413200

    Like

  4. McMartin Preschool defendants would like a word.

    Like

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