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Brian Jacobsen provides perspective on the Russia-Ukraine war and other key topics of the current week—plus, his thoughts about what the week ahead may hold. Here’s his report for the week of March 19–25, 2022.

The week that was

Russia-Ukraine update:

• Actions:
  • Russia demanded that that the people of Mariupol surrender in exchange for safe passage out of the port city. The Ukraine people rejected the offer.
  • Russia has used hypersonic missiles, which are capable of traveling more than five times the speed of sound, to attack targets in Ukraine.
  • Putin ordered that all natural gas sales to “hostile countries” (mainly the European Union) be denominated and settled in Russian rubles. He also said that volumes and prices will be set according to existing contracts.
  • President Biden told U.S. governors to prepare for potential Russian cyberattacks.
  • Group of Seven member countries said that if Russia uses chemical, biological, or nuclear weapons, there would be a response. They were not specific about what that response might be, but NATO has agreed to double the number of troops stationed along the group’s eastern border.
• Sanctions:
  • President Biden announced a widening of the net of sanctions imposed on people associated with Putin. Sanctions will be imposed on most members of Russia’s lower house of parliament, the State Duma. The U.S. is also sanctioning Russian defense firms.
  • President Biden said Russia should be removed from the G-20.
• Negotiations:
  • Ukrainian President Zelensky’s chief of staff, Andriy Yermak, said there was progress in negotiating for a ceasefire. He said he was cautiously optimistic that there could be a diplomatic end to the war.
  • The U.S. and Europe agreed to prioritize liquefied natural gas (LNG) shipments to Europe to reduce Europe’s dependence on Russian gas. President Biden promised a 15 billion cubic meter increase in LNG exports to Europe this year.
  • The U.S. and its allies are discussing how to address global hunger, which has been exacerbated by the high food and fuel prices stemming from Russia’s war on Ukraine.

Economics:

• Federal Reserve (Fed) Chair Powell delivered a speech on the economic outlook. He said the Fed is prepared to act faster or more aggressively to bring down inflation. He also said an announcement on Fed balance-sheet reduction could come as early as the May meeting, though a decision has not been made.
  • He said hiking by more than 25 basis points (bps; 100 bps = 1.00%) isn’t unprecedented, which is true. He also said there were three periods when the Fed acted aggressively and orchestrated a “soft landing” for the economy. What he didn’t say was that there were also a number of times when there wasn’t a soft landing.
  • Both Powell and St. Louis Fed President Bullard have pointed to 1994 as an example of when the Fed moved quickly and the economy didn’t feel ill effects.
    • Just as a reminder, in 1994, the Fed started the year with its target for the federal funds rate at 3.00% and ended the year with a target of 5.50%. The S&P 500 Index ended that year just about where it started after having a couple of 5%‒8% drawdowns. The 10-year Treasury yield went from around 5.80% to finish 1994 at 7.82%—a pretty tough year for bonds.
    • A really important difference between today and 1994 is that February 1994 was the first time the Federal Open Market Committee (FOMC) released a policy statement right after a meeting. Prior to then, the public had to wait a few weeks for the meeting minutes to be released or until the Fed chair delivered a speech to find out why the FOMC did what it did. That first policy statement may have been more confusing than clarifying. Today, the FOMC telegraphs what it plans on doing very far in advance.
    • Instead of like 1994, is this cycle going to be more like 1999? That wasn’t a very soft landing. The unemployment rate in June 1999 was 4.2%. The Fed feared inflation at that point, while today inflation is all around us. So, today’s situation is quite different—but back then, the Fed hiked too fast and too much. Within a year, the Fed had to reverse course. A soft landing is not guaranteed.
  • The Fed may also figure that if the market is already pricing in a certain path of rate hikes, it wouldn’t do much harm to simply catch up to what the market has already priced in. If the Fed only aims to match market expectations, that’s probably fine. What would be more worrying to me is if the Fed is actually trying to manage expectations higher instead of merely matching expectations.
• Norway’s central bank hiked its target rate by 25 bps. Shortly after, Jens Stoltenberg withdrew as head of Norway’s central bank. The Swiss National Bank left policy unchanged but said it’s willing to intervene to keep the Swiss franc from appreciating too much. South Africa’s central bank hiked its target rate by 25 bps to 4.25%, citing the likelihood of higher inflation. Mexico’s central bank hiked its target rate 50 bps, to 6.50%. Before the official announcement, Mexico’s president let it slip that the bank was hiking rates.
• Eurozone economic activity surprised to the upside, according to surveys of purchasing managers in Europe. There are concerns, of course, about high input prices.

Politics:

• Justin Trudeau, Canada’s prime minister, came to an agreement with the New Democratic Party to keep his Liberal Party of Canada in power until 2025. The next fixed election date is October 25, 2025.
• The U.S. and the U.K. agreed to end tariffs on some goods from each country. The U.S. will remove tariffs on U.K. steel and aluminum while the U.K. will remove tariffs on U.S. motorcycles, whiskey, and tobacco.
• There were confirmation hearings in the Senate for Judge Ketanji Brown Jackson’s appointment to the Supreme Court.
• North Korea tested an intercontinental ballistic missile.

The week to come

• The biggest data points in the U.S. for next week will likely be the personal consumption data for February, the Institute for Supply Management® Services Purchasing Managers’ Index for March, and then Friday’s employment situation report for March. The unemployment rate in February was 3.8%, and wages grew 5.1% year over year. The consensus is looking for further improvements.
• Outside of the U.S. data, the most important data releases will likely be the China Federation of Logistics and Purchasing Manufacturing Purchasing Managers Index and the China Non-Manufacturing Purchasing Managers Index for March. These could show a bit of economic slowing in China.

Thanks for reading, stay informed!

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