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Market Watch: March 4, 2022

Mar 4, 2022 | 2:58 PM

Big Picture

Global Markets Volatile, Oil Prices Climb as War in Ukraine Rages On

The crisis in Ukraine continued to create volatility across global markets on Monday, helping send the Dow and S&P 500 lower and the Russian ruble plunging. In response to crippling sanctions levied against Russia by a range of Western nations, Russia’s central bank enacted an emergency interest-rate hike to stabilize the ruble, more than doubling its benchmark rate to 20 per cent, hours after imposing other market restrictions. North American markets were surprisingly resilient on Monday, with the Nasdaq climbing 57 points, while the Dow and S&P 500 fell 166 and 11 points, respectively. In Canada, the TSX rallied late in the day and finished slightly positive for the session.

On Tuesday, North American stock indexes fell, bond yields retreated, and crude prices climbed above $100 per barrel to their highest level since 2014, as Russia’s invasion of Ukraine continued to wreak havoc on markets. The losses for U.S. markets were fairly steep, with the Dow dropping nearly 600 points, while the Nasdaq surrendered 219. Losses for the TSX were fairly modest, just 122 points, as surging energy prices and materials strength helped to cushion the blow.

North American markets rebounded Wednesday, and crude prices surged past $110 a barrel as fighting intensified in Ukraine. Despite the war, interest rates were top of mind for many North American investors as the Bank of Canada raised rates by 25 basis points to 0.50 per cent, while Fed Chair Jerome Powell, appearing before a Congressional subcommittee, indicated he’d be proposing a 25-basis-point hike when the central bank meets in two weeks. By Wednesday’s close, all three major U.S. indexes had essentially recovered Tuesday’s losses, while the TSX added 251 points on energy sector strength. Meanwhile in Russia, stocks and derivatives trading was closed for a third straight day.

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North American markets registered minor-to-modest losses on Thursday as oil prices nearly reached $120 a barrel before falling a bit on hopes that the U.S. and Iran can agree to a nuclear deal that would allow Iran to deliver much-needed oil to an undersupplied market. By Thursday’s close, the Dow dropped 97 points, the S&P 500 lost 23 points, and the Nasdaq surrendered 214. In Canada, the TSX finished essentially flat. Finally, rating service Fitch downgraded Russia’s sovereign credit rating to junk status, indicating doubts over whether the country could continue to service its debt.

U.S. Indexes Lose Ground, TSX Gains on Energy Strength

For the four trading days covered in this report, the Dow lost 264 points to close at 33,794, the S&P 500 dropped 21 points to settle at 4,363, while the tech-heavy Nasdaq fell 156 points to close at 13,538. In Canada, the TSX gained 144 points to end at 21,250.

Strategy

U.S. Federal Reserve Chairman Jerome Powell’s testimony before Congress cements March rate hike

The Federal Open Market Committee (FOMC) is set to deliver a 25bps rate hike at the March meeting, with more to come, however the Russia-Ukraine conflict is clouding the outlook.

U.S. Federal Reserve chairman Jerome Powell is due to appear before the Senate Banking Committee today, completing his two-day testimony before Congress as he lays outs the central bank’s strategy to combat inflation and normalize policy. Yesterday, Mr. Powell told the House Financial Services Committee that he will propose and support a 25bps rate increase at the FOMC meeting on March 16th. The Fed chief said it was too soon to conclude how Russia’s invasion of Ukraine will affect the U.S. economy and what that means for policy. Powell didn’t altogether dismiss the possibility of a more aggressive rate-hike path if the uncertainty from Russia-Ukraine subsides.

Notably, he mentioned the possibility of 50bps hikes at one or multiple meetings if inflation remains elevated. On the inflation outlook, the immediate impact on prices from the Russia-Ukraine war is likely to be for headline inflation to rise. Mr. Powell explained that the textbook response to an energy price shock is to look through it. Notably, Mr. Powell defended the Fed’s view that supply issues play a major role in pushing prices higher. He pointed out that inflationary pressures are stemming from the goods sector, which “has been a source of disinflation for a quarter of a century.” Our baseline is that the uncertainty from the Russia-Ukraine situation will linger this year, likely leading to less aggressive tightening but could lead to a shift for more actions next year.

Secondary labour market data point to another strong nonfarm payrolls print for February. Initial jobless claims continued to fall as an acute shortage of workers kept layoffs at a minimum. The trend may intensify with employers announcing fewer job cuts, which tend to lead layoff figures, down 20 per cent in February from the previous month, according to a Challenger report released earlier this morning. Seasonally adjusted initial jobless claims for the week ended February 26th declined to 215k from 233k previously. The insured unemployment rate, the number of people currently receiving unemployment insurance as a percentage of the labour force, held at 1.1 per cent in the week ended February 19th, a result which is consistent with maximum employment.

Indeed, businesses continued to hold on to their workers, and their announced plans to hire hit the highest on record, according to the same Challenger report. The reading follows a surprisingly strong 467k gain in for January’s nonfarm payrolls and significant upward revisions to the November and December readings, which were raised by a total of 709k jobs. February nonfarm payrolls rose by 678k ahead of consensus estimates of 440k. U.S. factory goods orders rose 1.4 per cent in January, on a month-over-month basis, up from last month’s upwardly revised reading of 0.7 per cent and ahead of consensus of 0.7 per cent. Consumer durable goods marked notable declines but were offset strength in capital goods and defense categories.

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