Good morning contrarians!
Stock futures are rebounding strongly after another day of selling on Wall Street. Tech is leading the move higher, with the Nasdaq up about 2% as of 0630. Dow Industrials and S&P 500 are up well over 1% as well. Europe is seeing gains across the board, with the DAX in Frankfurt and CAC in Paris up over 4% each.
Commodities are dropping a bit, with WTI crude down 2% to trade around $121/barrel. Wheat is down 6%. Gold, silver, and copper are down 1% each. Palladium and aluminium are up multiple percent. Nickel remains suspended, apparently the rest of the week after running up 70% gains yesterday.
Bonds are selling off as well, continuing the risk-on theme. The yield on the 2-year is up 3 basis points to 1.66%. The 10-year is also up 3bps to trade around 1.9%. Cryptos are continuing to rally with bitcoin up 8% to move north of $42,000.
It’s unclear what is causing this reversal in risk assets. The situation in Ukraine remains as it was before. This leads to suspicion this is a typical bear market rally. More on that in the bottom line.
Global Uncertainties
The problem facing markets is first and foremost a geopolitical one: How, if at all, will the conflict in Ukraine end? Nobody has any answers to that. We just have to watch developments from the negotiations and hope they lead somewhere.
Then we are faced with the issue of commodities supply. Unless Russia’s regime is replaced by a friendly pro-western one overnight (highly unlikely) all of the oil, gas, wheat, palladium, neon, etc. etc. produced by that country remains removed from western supply chains. The U.S. has already said it will stop importing Russian oil and gas. Europe may follow suit or it may not, but many companies have already stopped drilling in Russia. As a result, all of these commodities are several orders of magnitude more expensive than they were at the start of the year.
This leaves Europe staring down the barrel of a recession. The U.S. is a bit more removed, but it would be foolish to think we are immune from these problems. Eventually, higher prices of goods take their toll on consumption habits. That is true even for consumers as voracious (if not addicted) as Americans.
And the U.S. does have mounting inflationary pressures. Even before Russia’s invasion, consumer price inflation in the U.S. was at multi-decade highs. We’ll get a fresh reading of this tomorrow, but the point is that it leaves the Federal Reserve with no choice but to tighten monetary policy, at least for a bit.
Sometimes higher prices of commodities can be helped by central banks tightening monetary policy. This is not one of those times. The issue is much more structural: where is the supply of commodities going to come from? Venezuela? Iran? Africa? More from the Middle East? Opening up U.S. drilling becomes as political question of course. Let’s not go there.
JOLTS
The Bureau of Labor Statistics publishes its Job Openings and Labor Turnover Survey (JOLTS) for January at 1000. This may offer a bit of a reprieve from all the Russia-Ukraine stuff, but not much.
For one, this report is entirely backward looking, capturing a time before Russia’s invasion of Ukraine. For another, the U.S. labor market is not really a point of concern. If employment conditions start to weaken in the U.S. then that will be a major problem indeed. But these things very rarely reverse on a dime.
Still, it’s worth watching the JOLTS to make sure employment was keeping apace in January. Economists expect 10.9 million job openings, unchanged from what was reported in December.
Earnings
A couple to tell you about here: Campbell’s (CPB), United Natural Foods (UNF), CrowdStrike (CRWD), Express (EXPR) all report today.
The Bottom Line
It is becoming clear that higher commodity prices are here to stay — and will probably get worse before they get any better. This keeps the Fed’s hands tied. J. Powell & Co. cannot engineer their way out of this; interest rates are already at zero and additional quantitative easing will just make prices become even more unglued.
Without a resolution to the supply issues caused by Russia, the Fed really has just one option: raise rates at a measured pace and wait for demand destruction. Then commodity prices will drop, inflation will ease, and the Fed can start a fresh round of liquidity injections. But that may be a year or more away. And will bring a lot of pain in the interim.
This makes one skeptical about this morning’s rally. Remember too that this type of movement is typical of bear markets: a spike in futures and higher open, followed eventually by a reversal and selling — often to new lows — into the close. We saw that very thing yesterday. Will today bring a repeat performance? We’ll have to see.
Global Uncertainties: Daily Contrarian, March 9