Bassanese Bites: Powell and Putin – February 14 2022

Global markets

A hot U.S. consumer inflation report and fears of a Russian invasion of Ukraine dominated market sentiment last week, resulting in global equities retreating after bouncing back over the previous two weeks. Markets are once again looking vulnerable – if Powell does not get you, Putin just might. The S&P 500 dropped 1.8%, while U.S. 10-year bonds ended at 1.94% after breaking above 2% earlier in the week.

Equities started the week on a hopeful note, with investors cheered by commentary suggesting the Fed at least won’t hike rates by 50bps at the upcoming March meeting. But a stronger then expected CPI report – headline inflation hit 7.5% compared to a market expectation of 7.3% – led those fears to resurface, which was not helped by comments from the Fed’s Bullard ruling out neither such a move nor even a move before the meeting. Adding to the angst, no less than the White House warned of a possible Ukraine invasion on Friday, which further hit stocks and sent the oil price soaring.

Goldman Sachs on Friday also argued the Fed would raise rates seven times this year – by 25bps at each of the remaining meetings! What’s more, this now is virtually fully priced into the market. Another worry is Friday’s further slump in U.S. consumer sentiment, reflecting fears over both interest rates and inflation.

Against this backdrop, the broadly solid Q4 earnings season still underway has taken a back seat.

In terms of the week ahead, Ukraine clearly will be in focus. Otherwise, minutes to the Fed’s January meeting are released Wednesday as is the producer price index. There’s also no fewer than six Fed speakers out and about, who no doubt will share their own views about a likely 50bps move in March and the road ahead. All up, it’s a minefield of potentially explosive issues that the market will need to carefully navigate through.

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