Despite Valentine’s Day, we are not expecting any love from the Fed this week. Stocks are likely to be volatile in the week ahead as investors watch the tension between Russia and Ukraine and debate how quickly the Federal Reserve can raise interest rates.
Oil demand has outpaced production growth as economies slowly rebound from the worst of the pandemic, leaving the market with a small buffer to mitigate an oil-supply shock. Russia is the world’s third-largest oil producer. If a conflict in Ukraine leads to a substantial decrease in the flow of Russian barrels to the market, it would be difficult for the right balance between supply and demand.
These dynamics have led traders, in recent days, to price in a sizable geopolitical risk premium. Crude oil prices, which have not topped $100 a barrel since 2014, jumped to an eight-year high on Ukraine concerns Friday.
Markets were roiled in the past week, and bond yields spiked after hot inflation reading Thursday upended many Wall Street forecasts for interest rate hikes. After the White House warned that Russia could invade Ukraine during the Olympics, investors were dealt another blow Friday. The US and UK have alerted their citizens to leave Ukraine as soon as possible.
The major averages slid sharply on Friday afternoon, and Treasury yields came off the highs they set after Thursday’s report that January’s Consumer Price Index jumped by 7.5%, a 40-year high. The S&P 500 lost 1.8% for the week, falling to 4,418.
With about two hours left to Friday trading, US National Security Advisor Jake Sullivan told a White House briefing that there were signs of Russian escalation at the Ukraine border and an invasion during the Olympics is possible, despite contrary speculation.
The Russian tensions complicate the central bank’s outlook, and an invasion would add to already hot global inflation. It is causing problems for the Fed as this would inflate oil and food prices, making the Fed’s inflation-fighting capability that much more challenging to manage.
Fed speakers will be a highlight this week, particularly St. Louis Fed President James Bullard, who speaks on Monday. Bullard added to market turbulence and the sharp jump in bond yields on Thursday when he said that he would like to see rates rise by 100 basis points by July.
The Federal Reserve will release minutes from its last meeting on Wednesday. Investors are observing it for new insights on its plans for rate hikes, the inflation outlook, or comments on its balance sheet.
There will also be more critical inflation data when the Producer Price Index is reported Tuesday. This report is expected to be very hot after January’s CPI. Surging inflation has caused consumer sentiment to slump, and now economists are observing consumer spending closely, which means January’s retail sales will also be significant when it is reported Wednesday.
Fed Governor Lael Brainard speaks Friday, as does Fed Governor Christopher Waller, while Mester speaks Thursday.
