Russian Conflict Intensifies

The war is intensifying outside of Ukraine as the West and Russia go head to head. Earlier this week, President Biden announced a U.S. ban on all Russian oil, liquefied natural gas, and coal. The President 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 barrels a day. In total, the U.S. imported 7.86M barrels per day of petroleum in 2020, primarily from Canada and Mexico. Russia comes in at number three.

According to reports, President Biden is scheduled to announce further action today, tacking on to the?"mother of all sanctions"?as the administration calls for an end to normal trade relations with Moscow. The decision, which will be taken along with the European Union and G7 countries, will revoke 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.

In retaliation, Moscow announced an export ban on more than 200 products, ranging from fertilizer and agricultural machinery to telecoms and turbines. The ban, however, does 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."

This week in the?Economic Insight?we focus on the growing impact of the Cold War between Russia and the rest of the world and the particularly devastating impact on the agricultural market. While energy prices are a rising concern for market participants, a second crisis may be looming far from the pump, down on the farm.

Yesterday, the latest read on consumer prices showed that 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. Also, education and communication costs were unchanged, while recreation prices gained 0.7% in February following a 0.9% increase in January.

Bottom Line:?The relentless backup in prices continues, mounting pressure on consumers and businesses alike. Up until this point with trillions in government dollars still artificially propping up spenders, producers have been able to pass cost increases onto the consumer. Going forward, however, as federal supports expires, savings dwindle and real wage growth remains negative, consumers will have an increasingly difficult time absorbing higher prices.

From a policy standpoint, this has left the Fed in a difficult position. The Fed wants to rein in inflation and inflation expectations, but policy makers have also acknowledged the still fragile nature of the recovery. The Committee also recognizes the limitations of policy to fight inflation stemming from supply-side constraints without pulling the rug out from under the domestic economy and risking the?“R”?word – recession – or worse, the?“S”?word – stagflation.

That being said, next week the Fed is expected to raise rates a quarter point to a range of 0.25-0.50%. The Committee is also expected to increase its inflation outlook and the famed dot plot is expected to show further rate hikes in 2022 and 2023 relative to the December forecasts. That being said, Fed Chairman Jerome Powell is likely to reiterate the notion that policy is not on a predetermined pathway and policy makers must remain?“nimble”?in their response to inflation and international events.

Meanwhile, the European Central Bank (ECB) appears more confident in taking a more aggressive approach to normalizing policy in a post-Covid world, or at least equally committed to take whatever action is needed to ensure price stability. While emphasizing the need for flexibility in the face of the same stagflation fears as the Fed, yesterday the 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 yesterday, 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%.

Also on the economic calendar, yesterday, aside from inflation, 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.

This morning, 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 since 2011. Inflation expectations over the next 5-10 years held steady at 3%.

Next week’s key economic releases include:

On Tuesday, the PPI is expected to rise 0.9% in February and 10.0% over the past 12 months, up from the 9.7% gain in January. The core PPI is expected to rise 0.6% in February and 8.7% year-over-year, up from the 8.3% gain reported in January.

On Wednesday, retail sales are expected to rise 0.3% in February, down from the 3.8% increase reported in January.

On Thursday, housing starts are expected to rise 3.8% in February, while building permits are expected to decline 1.7%. Also, initial jobless claims are expected to decline from 227k to 215k in the week ending March 12.

Finally on Friday, existing home sales are expected to decline 4.6% from 6.50m to 6.20m in February.

-Lindsey Piegza, Ph.D., Chief Economist