Federal Reserve Chairman Jerome Powell was making himself very clear: To fight inflation, the US central bank will very soon begin withdrawing crisis-time support for the economy. But after Russia's invasion of Ukraine, Wall Street isn't convinced the Fed will have the same resolve to move aggressively.
What's happening: Bet the Fed will announce a hike in interest rates when they meet later this month. A week ago, traders saw a 34% chance of a 0.5 percent increase. They have now reduced the chances to less than 8%, according to CME Group data.
Michael Schumacher, head of macro strategy for Wells Fargo Securities, said: "The near-term effects of the crisis appear to be inflationary, but growth is hard to hit and puts central bankers in a very difficult position."
Powell is set to give his semi-annual testimony before the House Financial Services Committee on Wednesday. In prepared remarks, he said the Fed is prepared to raise rates in March, even as the conflict in Ukraine adds to near-term uncertainty.
Powell did not specify the size of the increase. Schumacher thinks he will "strongly signal" on Wednesday that the Fed will increase rates by 0.25 percent.
Others think he would like to keep all options open, given how fast the situation in Ukraine is developing.
"Once markets stabilize, the major implications for the Fed from geopolitical tensions will be renewed inflationary pressures through higher energy prices and newly disrupted supply chains," the Citigroup team told clients. The bank thinks Powell will leave the option of a bigger hike "on the table".
Breaking it down: Powell's testimony will be an important opportunity to provide investors with some clarity after last week's turmoil.
The focus will be not only on the outlook for interest rates, but also on the future of the Fed's massive bond-buying program, another lever used to bolster the economy. The Fed is set to end purchases of billions of dollars in securities earlier this month.
Yet the war in Ukraine has put the central bank in a difficult position. Prices of energy and other commodities such as wheat, a major export from Russia and Ukraine, are rising. This could weigh on global economic growth if it causes consumers to pull back spending.
That means the Fed will have to be careful about raising interest rates or taking steps to reduce holdings on its balance sheet if it triggers a recession or fresh market turmoil.
Plus, high inflation is exactly what policymakers are very concerned about, and many economists have already accused the Fed of being behind the curve. US President Joe Biden said during his State of the Union address on Tuesday that combating inflation was his "top priority".
That's why the road ahead is so rough. Robert Sears, chief investment officer at Capital Generation Partners, said the Fed could begin re-growing its nearly $9 trillion balance sheet if there is any indication that markets are not operating normally.
"Any risk of contagion in the system, you're likely to expand the balance sheet," Sears told me. "There is a willingness to support the system."
Oil prices jump above $110 a barrel as fears mount
Global crude oil prices rose above $110 a barrel and the price of natural gas hit a new record in Europe on Wednesday as Russia's escalating military operation in Ukraine sparked fear in markets.
Brent crude futures, the global benchmark, rose nearly 6% to $110.90 a barrel at 5:30 a.m. ET. US oil futures were trading with a slight discount at $ 109.30 per barrel. In Europe, the price of bulk natural gas rose by 60% to a record high of €194 ($215) per MWh.
Russia's energy wealth has not been directly targeted by Western sanctions imposed after the invasion of Ukraine. But Moscow is finding it difficult to sell shipments of Russian crude oil to traders and refineries, who are worried the financial system may be caught up in the fallout of sanctions targeted.
Tanker operators are wary of the risk to ships in the Black Sea, and major global oil companies are winding up their operations in the country.
Russia's leading Urals oil grade was trading at a discount of $18 a barrel against Brent crude on Wednesday as buyers gave up on Russian exports, according to analysts at Commerzbank.
S&P Global Commodity Insights' Shin Kim, oil chief, said: "The gap in oil prices reflects a clear reluctance to take on Russian crude, and there remains a risk of further sanctions that may indirectly or direct oil purchases or could affect the supply." Supply and production analysis.
According to Alex Frawley, market analyst at Independent Commodity Intelligence Services, natural gas flows from Russia to Western Europe are continuing as normal. But "there's a lot of uncertainty and anxiety about how things might turn out," he told me.
what happens next? Despite efforts by the West to pacify the markets, the prices have gone up drastically. On Tuesday, the United States and 30 other members of the International Energy Agency authorized the release of 60 million barrels of emergency oil reserves that would cover nearly two weeks of Russian oil shipments.
The Organization of the Petroleum Exporting Countries is due to meet with allied producers, including Russia, on Wednesday as the group comes under intense pressure from the West to dramatically increase production. But Saudi Arabia's government said on Tuesday that it thinks OPEC+ should stick to its plan to gradually increase production.
Shipping companies will no longer go to Russia
Two of the world's biggest container shipping companies are halting cargo bookings to and from Russia, another strain on the country as its economy is under heavy pressure from Western sanctions.
“As the stability and safety of our operations are already being directly and indirectly affected by sanctions, new Maersk bookings to and from Russia will be temporarily suspended, with the exception of food items, medical and humanitarian supplies. ,” shipping giant Maersk said in a statement. Tuesday.
“We are deeply concerned about how the crisis in Ukraine continues to escalate,” the company said, noting that “given the impact on global supply chain flows, such as delays, cargo by customs officials at various transshipment hubs Stopping, Unexpected Operation" has started. Effect."
Swiss-owned container shipping line MSC also said it would stop all cargo bookings to and from Russia from Tuesday.
Why this matters: These companies were not required to suspend sailors under sanctions imposed on Russia by Western countries. But this is another sign that businesses are finding it in their own interest to cut trade ties with the country. There are risks to their corporate reputation, and there are concerns about receiving payments with Russian banks under stress.
The change from shipping companies would also put pressure on Russia's economy, preventing major imports of goods.
"The country is now cut off from a large part of the world's shipping capacity," Hargreaves Lansdowne analyst Susannah Streeter said in a research note.
Next
Abercrombie & Fitch (ANF), Dine Brands (DIN) and Dollar Tree (DLTR) report results ahead of the US market opening. American Eagle (AEO), Snowflake and Victoria's Secret follow after close.
ALSO TODAY: Fed Chair Jerome Powell testifies before the House Financial Services Committee at 10 a.m. ET.
Coming Tomorrow: Earnings from Best Buy (BBY), Costco (COST) and Gap (GPS).