Month-In-Review: March 2022

With the measure of the conflict moving from days to weeks, investors fear ongoing disruption overseas will further exacerbate already heightened inflation pressures.?For the Fed, rising energy and commodity costs specifically, coupled with an ongoing “tight” labor market at home more than justifies a new, more aggressive approach to policy.?Ushering in the first rate hike since 2018, the Committee was clear that an even more aggressive pathway for policy – potentially including 50bp steps and a near-term draw down of the balance sheet – may be appropriate.?As a result, bond prices slumped and yields rose across the curve last month. The majority of the momentum, however, was on the shorter end, resulting in a significantly flatter curve.?By month end, for example, the spread between the 2-year yield and the 10-year yield was completely erased from 40bps one month prior, while the curve inverted between 5-year and 30-year yields.?

Market Activity and Commodities

·??????Equities – Stocks ended higher in March despite posting their worst quarter in two years. Beginning at 4,373.94, the S&P 500 rose 3.6% in March, closing at 4,530.41. The Dow, meanwhile, increased 2.2% in the third month of the year from 33,892.60 to 34,678.35. Additionally, the Nasdaq climbed 3.4% in March, closing at 14,220.52. For the quarter, however, the Dow and S&P 500 closed down 4.6% and 4.9%, respectively, while the Nasdaq lost 9%. The declines in the first quarter marked the worst period since the first quarter of 2020 during the start of the Covid-19 pandemic in the U.S.

·??????Treasuries – Treasury yields rose in March after also finishing higher in February. The 10-yr Treasury yield climbed 51bps from 1.83% to 2.34% in March after marking a near-term high of 2.48% on the 25th. The 2-yr Treasury yield, meanwhile, ended March up 91bps at 2.34% after reaching a near-term peak of 2.37% on the 29th. Since the Fed’s March 16 meeting, the 2-yr has risen 40bps, while the 10-year has gained 26bps. Additionally, on March 28, part of the yield curve inverted with the 5-year UST yield climbing to 2.63%, and the 30-year bond falling less than 1bp to 2.60%. This was the first 5/30s inversion since 2006. On March 31, the 2-year to 10-year Treasury curve briefly inverted around a level of 2.39%. This was the first 2s/10s inversion since 2019.

·??????Oil & Gas????????????

o??(Mar 2) – The White House released 30M barrels of crude from the U.S. Strategic Petroleum Reserve (SPR), which totaled 580M barrels as of February 25. According to the U.S. Department of Energy, in the event of a geopolitical conflict or crisis, at full capacity, the strategic reserve could provide only about 75 days of import protection. Already crude prices pushed over $110 for the first time since 2013. Gas prices, a lagging indicator of the energy market, rose 4% from a year ago to a national average of $3.65 per gallon.

o??(Mar 8) – President Biden announced a U.S. ban on all Russian oil, liquefied natural gas, and coal. Biden called the move "another powerful blow to Putin's war machine.” According to the Energy Information Administration (EIA), Russia accounts for roughly 8% of all crude imports and refined products, or nearly 700K bpd. In total, the U.S. imported 7.86M bpd of petroleum in 2020, primarily from Canada and Mexico with Russia coming in number three. In 2019, the U.S. became a net total energy exporter for the first time since 1952 and maintained that position in 2020 even though both total energy production and consumption were lower in 2020.

o??Despite a 4% drop in domestic crude oil production in 2020 from 2019, U.S. crude oil net imports in 2020 were the lowest since 1985. The Russian-Ukraine conflict has exacerbated the upward trajectory of costs with U.S. crude pushing to $123.70 a barrel, the highest level since 2008.

o??(Mar 21) – The International Energy Agency (IEA), which issued a call last year urging an end to new oil, gas and coal projects as a way to help the environment, issued a warning of an "emergency situation" for global energy security. The announcement accompanied a 10-point plan urging a reduction in consumption. In order to curb consumption – and ease price pressures – the report suggests lowering speed limits on highways, car-pooling, working from home, eliminating air travel for business, taking trains instead of planes, and the adoption of "car-free Sundays." Since the start of the Russia-Ukraine war, energy costs are up 8.6% with the price of gasoline topping $4.20 across the country.

o??(Mar 23) – Maryland and Georgia became the first states in the country to suspend their gas taxes. The measure in Maryland will be in effect for 30 days, saving drivers 36.1 cents per gallon on gas, or 36.85 cents per gallon on diesel fuel. Georgia's suspension will last through May 31, suspending levies of 29.1 cents per gallon on gas, and 32.6 cents per gallon of diesel. The average cost of gasoline has risen 48% from a year ago from $2.87 to $4.24 a gallon. Thus, assuming a two-car family, 20 gallon tanks, and filling up twice a month, the average family is spending roughly $110 more just to fill up the tank.

o??(Mar 25) – The state of California could potentially be sending out $400 gas cards per vehicle (topped at two vehicles per household) to all Californians in order to offset the burden of rising gas prices. California is experiencing some of the highest gas prices across the country at a state average of $5.90 versus a national average of $4.24. The program would cost the state $11B.

o??(Mar 31) – The Biden administration will release roughly 180M barrels of oil from the Strategic Petroleum Reserve (SPR), the largest release from the stockpile since its inception in 1975. According to the White House, the move is aimed at "lowering gas prices at the pump for American families." The strategic reserve, meanwhile, is a short-term solution intended only for “emergency circumstances.” In fact, Washington has released oil from the SPR roughly two dozen times in the past 47 years, but most of them have been on a small scale around 1M barrels in the wake of local disasters or emergencies. Unbeknownst to many, the strategic reserve is not a significant stockpile, although it did increase in size more recently under the Trump administration to its maximum capacity of 714M barrels. The latest proposed release of 180M barrels is the third mega release following 50M barrels and 30M barrels released earlier in November and March, respectively. WTI crude prices fell on the news, down 6.7% at $100.54 a barrel.

National Growth and Outlook

• NFIB Small Business Optimism (Mar 8) – The NFIB Small Business Optimism Index unexpectedly dropped from 97.1 to 85.7 in February, the lowest reading since January 2021. According to Bloomberg, the index was expected to rise to 97.3 in February.
• Leading Index (Mar 18) – The Leading Index rose 0.3% in February, as expected and following a 0.5% decline the month prior.
• Chicago Fed National Activity Index (Mar 21) – The Chicago Fed National Activity Index fell from 0.59, revised down from 0.69, to a reading of 0.51 in February, a two-month low. The Chicago Fed National Index draws on 85 economic indicators; a reading below zero indicates below-trend growth in the national economy and a sign of easing pressures on future inflation. In February, 61 of the 85 monthly individual indicators made positive contributions, while 24 made negative contributions.
• GDP (Mar 30) – GDP was unexpectedly revised down a tenth of a percentage point to a 6.9% increase on an annualized basis in the fourth quarter, albeit still the strongest pace in five quarters. According to Bloomberg, GDP was expected to be revised up to a 7.1% gain. For the full year, annualized GDP rose 5.7% in 2021, the strongest pace since 1984. In the details, personal consumption was revised down from a 3.1% rise to a 2.5% increase, following a 2.0% gain in Q3. Goods consumption was revised down from a 1.5% gain to a 1.1% rise, as durable goods consumption was revised down two-tenths of a percentage point to a 2.5% increase, and nondurable consumption was revised lower from a 0.8% rise to a 0.4% gain. Services consumption, meanwhile, was revised down from a 3.9% rise to a 3.3% gain, down from an 8.2% increase in Q3. Gross private investment, a gauge of business spending, was revised up from a 33.5% rise to a 36.7% increase in Q4, a five-quarter high. Fixed investment was revised up a tenth of a percentage point to a 2.7% rise in the final Q4 report, a two-quarter high. Nonresidential investment, including office buildings and factories was revised down from a 3.1% gain to a 2.9% increase, due to a downward revision to intellectual property investment from a 10.6% increase to an 8.9% gain. On the other hand, equipment investment was revised up from a 2.4% rise to a 2.8% increase. Structures investment, meanwhile, was revised up from a 9.4% drop to an 8.3% decline, the third consecutive quarter of contraction. Additionally, residential investment was revised up from a 1.0% rise to a 2.2% increase. On the trade side, exports were revised down from a 23.6% gain to a 22.4% rise, while imports were revised up three-tenths of a percentage point to a 17.9% rise. Finally, government consumption was unrevised at a 2.6% decrease, following a 0.9% gain the quarter prior. Federal spending was revised up two-tenths of a percentage point to a 4.3% decline, nondefense spending was revised higher from a 2.2% fall to a 2.0% decline, and national defense spending was revised up from a 6.1% decline to a 6.0% drop, the fourth consecutive quarter of decline. On the other hand, state and local spending was revised down from a 1.4% contraction to a 1.6% decline in the final Q4 report, following a 4.9% rise in Q3.

Employment

• Jobless Claims
• (Mar 3) – Initial jobless claims fell 18k from 233k, revised up from 232k, to 215k in the week ending February 26, the lowest level since the start of the year. According to Bloomberg, jobless claims were expected to decline to 225k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, rose slightly from 1.474M at 1.476M in the week ending February 19.
• (Mar 10) – Initial jobless claims rose 11k from 216k, revised up from 215k, to 227k in the week ending March 5, a two-week high. According to Bloomberg, jobless claims were expected to rise to 217k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, rose from 1.47M to 1.49M in the week ending February 25.
• (Mar 17) – Initial jobless claims dropped 15k from 229k, revised up from 227k, to 214k in the week ending March 12, a 10-week low. According to Bloomberg, jobless claims were expected to decline to 220k. Continuing claims, meanwhile, or the total number of Americans claiming ongoing unemployment benefits, fell from 1.49M to 1.42M in the week ending March 5.
• (Mar 24) – Initial jobless claims fell 28k from 215k, revised up from 214k, to 187k in the week ending March 19, the lowest since 1969. According to Bloomberg, jobless claims were expected to decline to 210k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, fell from 1.42M to 1.35M in the week ending March 12, the lowest since 1970.
• (Mar 31) – Initial jobless claims rose 14k from 188k, revised up from 187k, to 202k in the week ending March 26, a two-week high. According to Bloomberg, jobless claims were expected to rise to 196k. Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, fell from 1.34M to 1.31M in the week ending March 19, the lowest since 1970.
• Nonfarm Payrolls (Mar 4) – Nonfarm payrolls rose by 678k in February, surpassing the 423k gain expected, according to Bloomberg and the strongest pace of job creation since July 2021. January payrolls, meanwhile, were revised up from a 467k rise to a 481k increase, and December payrolls were revised higher from a 510k gain to a 588k rise. Thus, the overall change in nonfarm payrolls (February data + net revisions) was 770k. In the details, private payrolls rose by 654k in February, following a 448k gain in January. Goods-producing payrolls, meanwhile, rose 105k thanks to a 36k gain in manufacturing payrolls and a 60k rise in construction payrolls. Service producing payrolls rose by 549k in February, following a 424k gain in January. Leisure and hospitality payrolls lead the gain in service payrolls with payrolls rising 179k. Trade and transport payrolls increased 103k, thanks to a 37k gain in retail trade payrolls, and business services payrolls rose 95k due to a 36k rise in temporary help payrolls. Also, education and health payrolls increased 112k, information payrolls were flat, and financial payrolls rose by 35k at the start of the year. Additionally, government payrolls rose 24k in the second month of the year, following a 33k gain in January.
• Participation Rate (Mar 4) – The civilian labor force rose by 304k following a 1.4M gain in January. As a result, the participation rate unexpectedly ticked up from 62.2% to 62.3% in February, the highest since March 2020. According to Bloomberg, the participation rate was expected to be unchanged at 62.2%.
• Unemployment Rate (Mar 4) – Household employment rose by 548k in February following a 1.2M rise the month prior. With a 304k rise in the labor force, the unemployment rate declined from 4.0% to 3.8% in February, more than the expected decline to 3.9% according to Bloomberg, and the lowest since February 2020.
• Average Hourly Earnings (Mar 4) – Average hourly earnings were unexpectedly unchanged in February. According to Bloomberg, average hourly earnings were expected to rise 0.5% in the second month of the year. Year-over-year, wages rose 5.1% in February, a two-month low.
• Average Weekly Hours (Mar 4) – The average workweek rose from 34.6 hours to 34.7 hours in February, a two-month high.
• JOLTS
• (Mar 9) – According to JOLTS – the Job Openings and Labor Turnover Survey – the number of job openings declined from an upwardly revised 11.4M, a record high, to 11.3M in January. According to Bloomberg, 10.95M job openings were expected at the start of the year. Additionally, the quits rate dropped to 2.8%, a three-month low.
• (Mar 29) – According to JOLTS – the Job Openings and Labor Turnover Survey – the number of job openings ticked down slightly from 11.28M to 11.27M in February, albeit the third consecutive month over 11M. Additionally, the quits rate rose to 2.9%, a two-month high.

Consumer Activity and Confidence

• Vehicle Sales (Mar 1) – Total vehicle sales dropped from 15.04M to 14.07M in February, more than the expected decline to 14.40M, according to Bloomberg, and a two-month low. Year-over-year, vehicle sales dropped 11.7% in February, the eighth consecutive month of an annual decline.
• Consumer Credit (Mar 7) – Consumer credit rose by $6.838b in January, less than the $24.000b rise expected and the slowest increase in a year. According to reports, the slowest rise in a year is due to households paying down credit balances from the holiday season.
• University of Michigan Consumer Sentiment
• (Mar 11) – The University of Michigan Consumer Sentiment Index sunk from 62.8 to 59.7 in March, more than the expected decline to 61.0 according to Bloomberg and the lowest since 2011. In the details of the report, a gauge of current conditions fell from 68.2 to 67.8 in March, the lowest level since 2009, and consumer expectations dropped to 54.4, the weakest reading since 2011. Inflation expectations over the next 5-10 years held steady at 3%.
• (Mar 25) – The University of Michigan Consumer Sentiment Index unexpectedly declined to a reading of 59.4 in the final March print, the lowest in a decade. According to Bloomberg, the index was expected to be unchanged at 59.7. In the details, a gauge of current conditions decreased from 67.8 to 67.2, and the survey’s measure of future expectations were little changed at the lowest since 2011. Inflation expectations over the next 5-10 years held steady at 3%.
• Retail Sales (Mar 16) – Retail sales rose 0.3% in February, slightly less than the 0.4% rise expected and the weakest pace since December’s 2.7% drop. January sales, however, were revised up from a 3.8% rise to a 4.9% increase. Year-over-year, retail sales rose 17.6% in February, the strongest pace in three months. Car sales rose 0.8% in February following a 6.9% jump the month prior, while gasoline stations sales climbed 5.3% following a 1.7% drop the month prior. Excluding autos, retail sales rose 0.2% in February and climbed 17.7% over the past 12 months. Excluding autos and gasoline, retail sales fell 0.4% and increased 15.8% year-over-year. In the details, sporting goods sales rose 1.7%, clothing sales climbed 1.1%, and building materials sales increased 0.9%. Also, eating and drinking sales jumped 2.5% in February, following a 1.0% decrease in January, and miscellaneous sales rose 1.9%. On the weaker side, non-store retailer sales dropped 3.7%, furniture sales declined 1.0%, and general merchandise sales fell 0.2%, despite a 1.6% gain in department store sales. Additionally, health and personal care sales slid 1.8%, and food and beverage sales fell 0.5% in February.
• Consumer Confidence (Mar 29) – Consumer confidence, according to the Conference Board, rose from 105.7 to 107.2 in March, a two-month high. In the details of the report, consumer expectations dropped to 76.6, while the gauge of current conditions jumped ten points to a reading of 153.0 in March, an eight-month high.
• Consumer Spending & Income (Mar 31) – Consumer spending rose 0.2% in February, less than the 0.5% gain expected, according to Bloomberg, and the weakest monthly increase since December. Personal income, meanwhile, rose 0.5% in February, as expected and the strongest gain in three months. Year-over-year, consumer spending increased 13.7% and personal income rose 6.0%.

Inflation

• CPI (Mar 10) – The CPI rose 0.8% in February, as expected, according to Bloomberg, and following a 0.6% gain in January. Year-over-year, consumer prices jumped 7.9%, up from the 7.5% pace reported the month prior and the fastest rate since January 1982. Food prices rose 1.0% and energy prices increased 3.5% in February, following a 0.9% gain in January. Excluding food and energy costs, the core CPI rose 0.5%, also in line with expectations, according to Bloomberg, and following a 0.6% gain in January. Year-over-year, the core CPI increased 6.4%, the largest annual increase since August 1982. In the details, commodities prices rose 1.3%, medical care prices increased 0.2%, and apparel prices climbed 0.7% in February. Also, housing prices increased 0.5%, thanks to a similar rise in the OER, and other goods and services costs rose 1.1% in the second month of 2022. Additionally, transportation prices jumped 1.9%, thanks to a 0.3% gain in new vehicle prices. Used cars and truck prices, however, fell 0.2% in February. Additionally, education and communication costs were unchanged, while recreation prices gained 0.7% in February following a 0.9% increase in January.
• PPI (Mar 15) – The PPI rose 0.8% in February, slightly less than the 0.9% rise expected, according to Bloomberg, and following a 1.2% gain in January. Year-over-year, producer prices rose 10.0% in February, following a similar rise in January, and the largest gain on records dating back to 2010. Food prices rose 1.9%, and energy prices jumped 8.2% in February. Excluding food and energy costs, the core PPI rose 0.2%, less than the 0.6% rise expected, and following a 1.0% gain in January. Year-over-year, the core PPI increased 8.4% in February, down slightly from the 8.5% gain in January, the largest gain on record. Additionally, services costs were unchanged in February, despite a 0.2% gain in trade costs, and a 1.9% increase in transportation and warehousing costs.
• PCE (Mar 31) – The PCE rose 0.6% in February, as expected, according to Bloomberg, and up from a 0.5% increase the month prior. Year-over-year, headline inflation increased 6.4%, the most since January 1982. Excluding food and energy costs, the core PCE rose 0.4% in February, also as expected, according to Bloomberg, and following a 0.5% gain in January. Year-over-year, core inflation increased 5.4%, the fastest gain since April 1983.

Manufacturing and Production Activity

• ISM Manufacturing (Mar 1) – The ISM Manufacturing Index rose from 57.6 to 58.6 in February, more than the expected increase to 58.0 according to Bloomberg and two-month high. February’s reading of 58.6 marked the 21st consecutive month of a reading above 50, signaling expansion. In the details of the report, production rose from 57.8 to 58.5, new orders increased from 57.9 to 61.7, and supplier deliveries gained from 64.6 to 66.1, a three-month high. Additionally, imports climbed from 55.1 to 55.4 and exports jumped to 57.1, a one-year high. On the other hand, prices paid declined from 76.1 to 75.6 and employment fell from 54.5 to 52.9 in February, a four-month low.
• ISM Services (Mar 3) – The ISM Services Index unexpectedly fell from 59.9 to 56.5 in February, a one-year low. According to Bloomberg, the services index was expected to rise to 61.1 in the second month of the year. In the details, business activity fell from 59.9 to 55.1, the lowest since May 2020, new orders declined from 61.7 to 56.1, a one-year low, and employment dropped to 48.5 in February from 53.2, the lowest since August 2020. On the other hand, supplier deliveries rose from 65.7 to 66.2, a three-month high, and inventories increased from 49.4 to 50.7. Also, prices paid climbed from 82.3 to 83.1, and backlog of orders rose from 57.4 to 64.2 in February. Additionally, inventory sentiment increased from 47.5 to 55.3 in February, the highest since September 2020.
• Empire Manufacturing (Mar 15) – The Empire Manufacturing Index unexpectedly dropped 14.9 points from 3.1 to -11.8 in March, the weakest reading since May 2020. In the details of the report, prices paid fell from 76.6 to 73.8, a one-year low, while prices received rose two points to 56.1. New orders dropped from 1.4 to -11.2, and the number of employees slipped from 23.1 to 14.5 in March, a seven-month low. On the other hand, the six-month business conditions gauge rose from 28.2 to 36.6 at the end of Q1, the highest reading since November.
• Industrial Production (Mar 17) – Industrial production rose 0.5% in February as expected and down from the 1.4% gain at the start of the year.
• Capacity Utilization (Mar 17) – Capacity utilization increased from 77.3% to 77.6% in February. According to Bloomberg, capacity utilization was expected to rise to 77.9%.
• Philly Fed Business Outlook Survey (Mar 17) – The Philly Fed Index rose from 16.0 to 27.4 in March, a four-month high. In the details of the report, prices paid rose from 69.3 to 81.0, while prices received increased from 49.8 to 54.4 in March, a four-month high. New orders climbed from 14.2 to 25.8, and shipments rose from 13.4 to 30.2 at the end of the first quarter. Additionally, employment climbed from 32.3 to 38.9, and the average workweek increased from a reading of 10.8 to 21.4 in March, a three-month high.
• Richmond Fed Manufacturing (Mar 22) – The Richmond Fed Index jumped from 1 to a reading of 13 in March, surpassing the expected increase to a reading of 2, according to Bloomberg and a three-month high. In the details, shipments rose from -11 to +9, a two-month high, new orders increased from -3 to +10, and order backlogs climbed from -4 to +7 in March, a three-month high. Capacity utilization gained from -12 to +9, and inventory levels of raw goods rose to -15 from -22. Additionally, the number of employees rose three points to 23, a four-month high, and wages increased from 35 to a reading of 37 at the end of Q1. On the other hand, inventory of finished goods slowed from -14 to -15 in March.
• Kansas City Fed Manufacturing (Mar 24) – The Kansas City Fed Index unexpectedly jumped from 29 to a reading of 37 in March, the highest reading on record. According to Bloomberg, the index was expected to decline three points to a reading of 26. In the details of the report, prices paid surged from 64 to 81, production jumped from 31 to 46, and the volume of new orders rose from 32 to 33. Additionally, shipments increased from 24 to 46, and the six-month outlook rose three points to 41 at the end of the first quarter. On the other hand, the number of employees plunged from 26 to 18 in March, a three-month low.
• Durable Goods (Mar 24) – Durable goods orders dropped 2.2% in February, more than the 0.6% decline expected, according to Bloomberg, and the largest monthly decline since April 2020. Year-over-year, headline orders rose 11.8% in February, a four-month low. Transportation orders fell 5.6%, following a 3.2% increase the month prior, due to a 0.5% decline in vehicles and parts orders and a 30.4% plunge in civilian aircraft orders. Excluding transportation, durable goods orders fell 0.6% in February and increased 10.5% over the past 12 months. In other details, primary metals orders fell 0.9%, fabricated metals orders decreased 0.1%, and machinery orders dropped 2.6%. Additionally, computers and electronics orders dropped 1.1% in February. On the other hand, electrical equipment orders rose 0.2%, following a 0.9% increase the month prior.
• Capital Goods (Mar 24) – Capital goods orders dropped 4.6% in February. Nondefense capital goods orders, meanwhile, decreased 6.7%, following a 3.6% rise in January. Capital goods orders excluding aircraft and defense – a proxy for business investment – fell 0.3% in February, the first monthly decline in a year. Year-over-year, however, business investment increased 10.7%.
• Dallas Fed Index (Mar 28) – The Dallas Fed Manufacturing Activity Index dropped from 16.0 to a reading of 8.7 in March, more than the expected decline to a reading of 10.0, according to Bloomberg and a two-month low. In the details of the report, production declined from 14.5 to 13.2, new orders fell from 23.1 to 10.5, and the six-month outlook plunged from 20.6 to 8.2, the lowest reading since May 2020. On the other hand, employment rose from 18.4 to 25.5, a two-month high, and capacity utilization increased from 11.5 to 15.1 in March, the highest reading since December 2021.
• Chicago PMI (Mar 31) – The Chicago PMI rose from 56.3 to a reading of 62.9 in March, surpassing the expected rise to 57.0, according to Bloomberg and a two-month high. In the details, six of the components: business barometer, new orders, inventories, supplier deliveries, order backlogs and production rose at a faster pace, signaling expansion.

Housing Market Activity

• Construction Spending (Mar 1) – Construction spending jumped 1.3% in January, surpassing the 0.1% rise expected and following an upwardly revised 0.8% increase in December. Year-over-year, construction spending rose 8.2% at the start of the year, albeit the weakest pace since March 2021.
• NAHB Housing Market Index (Mar 16) – The NAHB Housing Market Index dropped two points to a reading of 79 in March, a six-month low.
• Building Permits (Mar 17) – Building permits fell 1.9% in February from 1.895M to a 1.859M unit pace, a three-month low. According to Bloomberg, building permits were expected to fall 2.4%. Single family permits fell 0.5%, and multi-family permits declined 4.4% in February. Year-over-year, however, building permits rose 7.7% in February, the strongest annual pace in six months.
• Housing Starts (Mar 17) – Housing starts jumped 6.8% in February, pulling the annual pace up from 1.657M to 1.769M, the highest level since mid-2006. According to Bloomberg, starts were expected to rise 3.8% in the second month of 2022. Single family starts rose 5.7%, and multi-family starts increased 9.3%. Year-over-year, housing starts rose 22.3% in February following a 2.0% gain the month prior. On a regional basis, starts rose in three of the four regions of the country in the second month of the year: starts increased 28.7% in the Northeast, 15.3% in the Midwest, and 11.4% in the South. On the other hand, starts fell 11.4% in the West.
• Existing Home Sales (Mar 18) – Existing home sales dropped 7.2% from 6.49m to 6.02m in February, a six-month low. According to Bloomberg, home sales were expected to fall 6.2% in the second month of the year. In the details, single family sales fell 7.0% and multi-family sales decreased 9.5%. Year-over-year, however, existing home sales dropped 2.4% in February, the seventh consecutive month of decline. As a result of a decline in sales, the months’ supply of existing homes rose from 1.6 to 1.7 months, averaging 1.7 months over the past three months. From a price standpoint, the median cost of a previously owned home rose 15.0% in February from a year earlier to $357k.
• New Home Sales (Mar 23) – New home sales unexpectedly dropped 2.0% from 788k to 772k in February, a three-month low. According to Bloomberg, new home sales were expected to rise 1.1% in February. Year-over-year, sales dropped 6.2%, the ninth consecutive month of an annual decline. Due to a fall in sales, the months’ supply of new homes rose from 6.1 to 6.3 months, a four-month high. From a price standpoint, the median cost of a newly constructed home fell 6.3% from the month prior to $401k. Year-over-year, however, new home prices increased 10.7%.
• Pending Home Sales (Mar 25) – Pending home sales unexpectedly dropped 4.1% in February, the fourth consecutive month of decline. According to Bloomberg, pending home sales were expected to rise 1.0% in the second month of the year. Year-over-year, pending home sales fell 5.4% following a 9.2% drop in January.
• S&P/CS 20 City Index (Mar 29) – The S&P Case-Shiller 20 City Home Price Index jumped 1.79% in January, surpassing the 1.50% gain expected and the largest monthly gain since June of last year. Year-over-year, the 20-city index rose 19.10%, the most in five months. On a national basis, home prices rose 19.17%, a four-month high.

Trade and Currency

• U.S. Dollar
• (Mar 17) – The U.S. dollar slid to its lowest in a week after investors digested the Fed’s latest policy move and the Committee’s more hawkish outlook for future rate increases. The dollar fell 0.5% to $97.980, although remained up 2.4% since the start of the year.
• Trade (Mar 8) – The U.S. trade deficit widened 9.4% from $82.0b to a record $89.7b in January. According to Bloomberg, the deficit was expected to widen to $87.3b at the start of the year. Imports rose 1.2% in January to a record $314.1b, while exports decreased 1.7% to $224.4b.
• Import & Export Prices (Mar 16) – Import prices rose 1.4% in February, less than the 1.6% gain expected and following a 1.9% increase in January. Year-over-year, import prices climbed 10.9%, a four-month high. Export prices, meanwhile, rose 3.0% in February and increased 16.6% over the past 12 months, the most in three months.

Monetary Policy, Reports, and Commentary

• Atlanta Fed GDPNow Forecast
• (Mar 3) – Following an unexpected decline in the ISM Services Index, the Atlanta Fed's GDPNow’s first-quarter 2022 estimate dropped further into negative territory from -0.2% to -0.4%.
• Fed Speak/News
• (Mar 2) – During Fed Chairman Jerome Powell’s semi-annual testimony to Congress, Powell said the central bank plans to raise rates at the March 16 FOMC meeting to counter rising costs. “With inflation well above 2% and a strong labor market, we expect it will be appropriate to raise the target range for the federal funds rate at our meeting later this month,” Powell said. According to Powell, “The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain…We will need to be nimble and responding to incoming data and the evolving outlook.” During the Q&A session with Washington officials, the Chairman also downplayed the Committee’s concerns regarding the economic fallout from the war in Ukraine. Powell described it as a humanitarian event, although expressed some concerns regarding the potential impact on the energy market. According to Powell, “The price of oil depends on events that haven’t occurred yet. It really depends on where this goes going forward. We have seen prices move up, including just in the last couple of days ... The effects are going to be passed through into gas prices, into lower economic activity and into inflation. … The question will then become … is that going to lead to repeated inflation increases at that time? And that is not necessarily the case.”
• (Mar 21) – Fed Chairman Jerome Powell said central bank was prepared to take even more aggressive steps to rein in inflation. Speaking to the National Association of Business Economics (NABE) Policy Conference attendees, Powell said the Committee is prepared to raise interest rates at an even faster pace, potentially in half-percentage-point steps and high enough to deliberately slow the economy if such steps were seen as necessary to tame inflation. “If we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well,” said Mr. Powell. “No one expects that bringing about a soft landing will be straightforward in the current con-text—very little is straightforward in the current context.” Monetary policy after all, he said, “is a blunt instrument, incapable of surgical precision.”
• (Mar 22) – St. Louis Fed President James Bullard, the sole dissent at the Fed’s last policy meeting in favor of a larger 50bps increase, reiterated his call for a faster rise in rates. Speaking to Bloomberg Television, Bullard said U.S. monetary policy should move quickly to slow the upward trajectory of inflation. “The Fed needs to move aggressively to keep inflation under control,” Bullard said in the interview. “We need to get to neutral at least so we’re not putting upward pressure on inflation during this period when we have much higher inflation than we’re used to in the U.S.”
• (Mar 24) – Speaking at the Bloomberg Equality Summit in New York, San Francisco Fed President Mary Daly indicated both a larger rate increase and balance sheet reduction may be appropriate at the next FOMC meeting in May. "I think the data will tell us whether 50 basis points, or 25 basis points with the balance sheet, is the right recipe; or 50 basis points with the balance sheet," she said.
• (Mar 24) – According to St. Louis Fed President James Bullard, the Fed needs to raise rates much faster to tame inflation. "The Fed needs to move aggressively to keep inflation under control…Faster is better,” Bullard said.
• (Mar 24) – Speaking on a call with reporters, Cleveland Fed President Loretta Mester said “some 50bp moves” will be necessary this year before reaching what she believes is a 2.5% target. Acknowledging inflation could be intensified by the recent conflict overseas, Mester noted the Fed should use all its tools, including balance sheet reduction, to tame prices and remove distortions from the credit markets: “We have told the markets that we would let them know what the balance sheet process would look like. I think given the situation we’re in and the communications that Chair Powell has already made about the balance-sheet process, I don’t have concerns that that would be destabilizing.”
• (Mar 25) – Fed Governor Christopher Waller spoke at a conference on housing. Though he did not specifically comment on his outlook for interest rates, he did suggest that rent prices will continue to drift higher. “Based on various measures of asking rents, some recent research suggests that the rate of rent inflation in the CPI will double in 2022,” Waller said. “If so, rent as a component of inflation will accelerate, which has implications for monetary policy.”
• (Mar 25) – Speaking at the Fargo-Moorhead Chamber of Commerce's Midwest Economic Outlook Summit, Minneapolis Fed President Neel Kashkari said that he has penciled in seven quarter-point interest rate hikes this year in line with the median forecast in the March FOMC dot plot. "We need to adjust... The data just keeps coming in in that direction, and we just have to respond,” Kashkari said.
• (Mar 29) – Former New York Fed President Bill Dudley warned the Fed will now be forced to tighten the economy into recession. Writing in Bloomberg, Dudley said because the Fed’s new framework allowed the Fed to be more patient in adjusting policy, it allowed inflation to get too high. Now, the Fed will be forced to raise rates higher and faster than they otherwise would have if they had moved sooner. As a result, the Fed is likely to choke off growth in order to rein in inflation.
• March 15-16 FOMC Meeting
• As expected, the Fed opted to raise rates 25bps to a range of 0.25-0.50%, hiking for the first time in three years. The accompanying statement, furthermore, indicated the Committee intends to continue raising rates and “anticipates that ongoing increases in the target range will be appropriate.” Striking a hawkish tone, the Committee emphasized its concerns of rising inflation and vowed to raise rates several times this year to rein in “broader price pressure.” With inflation rapidly rising as the global economy struggles to restore balance in the aftermath of Covid-19, the statement added that the war in Ukraine and “related events are likely to create additional upward pressures on inflation.” According to the Summary of Economic Projections (SEP), the majority of Fed officials expect to hike rates six more times this year, up from three in the December forecast. At the same time, Fed officials also anticipate a significantly reduced growth rate in the domestic economy. The Committee’s growth forecast was revised down from 4.0% to 2.8% in 2022, and remained unchanged at 2.2% and 2.0% in 2023 and 2024, respectively. Aside from raising rates, the statement also signaled that the Fed could soon begin a drawdown of the balance sheet which has ballooned to near $9T. According to the statement, “In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.” The decision was shy of unanimous with St Louis Fed President James Bullard voting in favor of a 50bps increase.

Domestic News and Activity?

• Politics and the Biden Administration
• (Mar 2) – President Biden addressed the nation in his first State of the Union. Early on in the address, the focus was on the Russian invasion of Ukraine, urging unity among the American people and the world in its fight against Russian aggression. The President vowed that Vladimir Putin will have to "pay a price" for the invasion. President Biden also vowed to fight inflation during the speech. With still a heavy reliance on foreign energy production, fears of a further backup in prices, particularly at the pump, are weighing heavily on American consumers and businesses. "My top priority is getting prices under control. We have a choice. One way to fight inflation is to drive down wages and make Americans poorer. I think I have a better idea to fight inflation: Lower your costs, not your wages. Make more cars and semiconductors in America. More infrastructure and innovation in America. More jobs where you can earn a good living in America instead of relying on foreign supply chains, let's make it in America. My plan to fight inflation will lower your costs and lower the deficit." Following Biden’s State of the Union address, West Virginia Senator Joe Manchin said, “I’ve never found out that you can lower costs by spending more.”
• (Mar 11) – According to reports, President Biden tacked on to the "mother of all sanctions" as the administration called to an end of normal trade relations with Moscow. The decision, which was taken along with the European Union and G7 countries, revoked Russia's "most favored nation" status, clearing the way for increased tariffs on imports. Like the energy embargo, the direct impact will seemingly be a larger hit for our European counterparts. After all, according to the International Monetary Fund (IMF), about a third of Russian exports head to the EU, compared to around 5% to the U.S.
• (Mar 29) – President Biden laid out a $5.79T budget plan for the fiscal year beginning October 1. A notable inclusion is a 20% minimum tax rate on U.S. households worth more than $100M, or roughly the wealthiest 0.01% of American households. According to reports, the plan also requires company executives to hold on to shares they receive for several years after a stock buyback. Additionally, the corporate tax rate would be raised from the current 21% to 28%. The new proposal would furthermore expand the tax code's definition of "income" by taxing unrealized capital gains. Finally, the budget also includes a 4% defense spending increase aimed to appease Republicans.

International News and Activity?

• European Union
• (Mar 10) – The European Central Bank (ECB) announced a faster pace of reductions for asset purchases. Monthly net purchases under the program would amount to 40 billion euros ($44.5 billion) in April, 30 billion euros in May and 20 billion euros in June. Additionally, the central bank kept interest rates unchanged, leaving the benchmark refinancing rate at 0%, the rate on its marginal lending facility at 0.25%, and the rate on its deposit facility at -0.5%.
• (Mar 21) – In order to ensure food access and sustainability because of the Russian invasion of Ukraine, the Hungarian government banned grain exports, while Moldova and Serbia restricted sales of crops like wheat and sugar. Bulgaria also allocated government funds to increase its national grains reserve, while officials in France proposed the need to stockpile grains.
• Russia
• (Mar 11) – In retaliation to the revocation of its "most favored nation” status, Moscow announced an export ban on more than 200 products, ranging from fertilizer and agricultural machinery to telecoms and turbines. The ban, however, did not include the sale of energy and raw materials, the nation's largest contribution to global trade. Speaking to reporters on a press call, Kremlin spokesman Dmitry Peskov said, “Our economy is experiencing a shock impact now and there are negative consequences, they will be minimized. This is absolutely unprecedented. The economic war that has started against our country has never taken place before. So it is very hard to forecast anything."
• China
• (Mar 14) – Due to China’s "zero-COVID" strategy, the country placed the 17.5M residents of Shenzhen into lockdown, and implemented three rounds of city-wide testing. All bus and subway systems closed, and businesses – except those deemed essential services – were shuttered.
• (Mar 28) – China implemented another round of restrictions under its zero-Covid strategy with Shanghai launching a two-stage lockdown, closing down bridges and tunnels, and restricting highway traffic in China's largest city. Residents were also barred from leaving their homes, while many production plants went offline, including Tesla's factory in Shanghai.
• The U.K.
• (Mar 17) – The Bank of England (BOE) raised its key interest rate for the third time from 0.50% to 0.75%. The BOE, like the Fed, is contending with decade’s high inflation with prices expected to push higher in the wake of the Ukraine-Russia conflict.

-Lindsey Piegza, Ph.D., Chief Economist

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