Invasion fears, inflation concerns weigh on investors
Client Relationship Management
Corporates | Kennett Square, PA
All eyes are on Ukraine as concerns over an all-out Russian invasion reach new highs, ratcheting up pressure on global bond and commodity markets. In the U.S., strong retail sales numbers reinforced persistent fears of record-high inflation as the Federal Reserve signals imminent rate hikes.
Geopolitical headlines roil energy markets
Invasion fears spooked energy markets in recent days, pushing Brent Crude to a fresh multi-year high of $96.93/Bbl, though prices were slightly moderated last week as investors weighed prospects of new crude supplies from Iran. Natural gas also rallied, topping $4.78/MMBtu, amid high global demand and the supply-cut threat from Russia.
Russia, the world’s second-largest producer of natural gas and third-largest producer of petroleum products, comprises a significant portion of Europe’s energy market. Any invasion would likely threaten regional and global supply, placing upward pressure on prices as pipelines and supply chains become disrupted. Friday evening, President Biden reaffirmed fears of an impending conflict, revealing he is now “convinced” Russia has decided to carry out a full-scale attack “in the coming days.” Those concerns were all but realized Monday when the Kremlin ordered Russian forces into Ukraine’s Donbas region after Russian President Vladimir Putin announced he would recognize the region's independence.
Markets are also closely monitoring news out of Iran, as the OPEC+ member appears close to accepting a deal on its nuclear program. A lift on sanctions would resume Iranian oil exports, injecting an additional supply of approximately 1.3 million Bbl/day into the global oil market.
FOMC minutes, Fed signaling reinforced by strong consumer spending
Retail sales saw a strong increase in January of +3.8%, surpassing expectations of +2.1% and December’s figure of -2.5%. Online shopping increased +14.5% in January alone, while furniture and motor vehicle sales were also up month-over-month. The report highlights that Americans remain willing to spend, even in the face of persistent, record inflation.
Despite the strong retail metrics, investors reviewed last week’s FOMC minutes closely for clues on what to expect from the Fed in the coming months. Inflation remains the primary point of discussion as Fed officials mentioned it 73 times during last Wednesday’s meeting. Members acknowledged that inflation has been stronger and more persistent than anticipated and affirmed that a “significant reduction in the size of the [Fed’s] balance sheet would likely be appropriate.” Markets continue to price in an end-of-year Fed Funds rate at 175-200bps, with overwhelming expectations that the first rate hike occurs in March.
Yields retreat slightly and USD strengthens as investors seek safety
As investors consider the Fed’s next move, US 10Y yields retreated from their two-year high to 1.87%, as a heightened risk-off sentiment spreads amongst global investors and bond prices increase given heightened geopolitical tensions and inflation concerns. The U.S. dollar also remained strong as DXY topped 96.14 amid the turmoil and a global flight to safe-haven currencies. Many corporates are evaluating the collective impact of short- and long-term interest rate volatility, USD performance relative to global exposure profiles, and variability in underlying business forecasts in order to manage and communicate financial risk in the current environment.
The week ahead
Markets are expected to remain on edge as investors continue to closely monitor the Russian-Ukraine situation, and whether a diplomatic resolution to the crisis can be achieved. No Fed officials are expected to speak during the short trading week. On the data side, manufacturing and services PMI will be released Tuesday, revised Q4 2021 GDP on Thursday, and personal spending data on Friday.
Subscribe to receive our market insights and webinar invites
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.22-0045
Our featured insights
GDP, PCE take steps in the right direction ahead of Fed meeting, China’s reopening leads to commodities shift
December metrics for GDP and inflation came in at promising levels, keeping market expectations consistent ahead of this week’s FOMC meeting. China’s reopening leads to increased economic activity, including increased demand for metals and oil, while natural gas struggles due to unexpectedly warm...
Retail sales, producer price data suggest cooling economic activity
Markets responded positively to declining PPI and retail sales figures, suggesting that U.S. economic activity, and notably inflation, is slowing. Investors are pointing to the data as another piece of evidence that the Federal Reserve will be able to soften its hawkish stance on rate tightening...
Labor market remains stoic as U.S. inflation slows, dollar weakens
The Federal Reserve appears to be in control of inflation after the most recent consumer price index report. Questions linger regarding future rate increases and the subsequent impact on the labor market. The dollar continues its march down from last year’s highs.
2023 corporate treasury trends
Corporate treasury and accounting teams face a daunting list of concerns as they plan for 2023. Inflation at multi-decade highs, a war in Europe for the first time in 75 years, global central bank tightening, a roller coaster ride in on equity prices, and recession fears all pose challenges to...
U.S. jobs market remains strong, nonfarm payrolls data suggest slowing inflation
December payrolls surpassed expectations Friday morning as the U.S. added 223,000 jobs to the economy. While the labor market remains strong, investors noted that wage inflation appears to be easing. On the commodity front, oil and natural gas markets lagged to start the year due to global demand...
Markets mixed as focus turns to 2023
Markets were largely quiet around the holidays, with strength in the jobs market and signs of reduced inflation helping to provide some risk-on sentiment. At the same time, the rise in COVID cases in China put downward pressure on demand forecasts for next year.
The market is fighting the Fed yet again
After inflation, retail sales, empire manufacturing, and the Philadelphia Fed business outlook all came in below estimates last week, the market — as evidenced by Treasuries and forward curves — broadly disagrees with the Fed’s interest rate outlook.
7 ways to maximize FX and commodity hedging impact while minimizing costs
Hedge program costs can range from forward points, to trading costs, to fixed and variable operational costs that include systems and personnel. Program benefits often include risk reduction, operational ease, and favorable accounting treatment. This article will address leading practices and...