Psycho’s Market Recap – March 21, 2022

Stocks fell on Monday, giving back some gains from last week’s remarkable rally as market participants digested new, hawkish commentary by Federal Reserve Chair Jerome Powell. On the other hand, after falling roughly 30% from recent highs, the price of oil resumed its march higher, jumping 7.5% to around $110 per barrel.

Markets Today

  • S&P 500 (SPY): -0.03%
  • Nasdaq (QQQ): -0.28%
  • Dow Jones (DIA): -0.50%
  • Russell 2000 (IWM): -0.88%
  • Volatility Index (VIX): -1.42%
  • Meta (FB): -2.31%
  • Shopify (SHOP): -12.38%
  • Tesla (TSLA): +1.74%
  • Occidental Petroleum (OXY): +8.39%
  • Cleveland-Cliffs (CLF): +4.44%
  • Alleghany (Y): +24.80%

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Energy and commodity prices spiked again amid the latest developments in Russia’s war in Ukraine. As of Monday, Ukraine refused to surrender its heavily attacked port city of Mariupol to Russian forces. Russian forces, facing stiff resistance, have sought to gain control of major cities but have so been unsuccessful. The Kremlin says its “special operation” is going as planned. But a senior Pentagon official, who spoke on condition of anonymity Monday, told Reuters Russian President Vladimir Putin has not achieved his goals and is relying on bombing raids in cities like Mariupol in a “near-desperate” effort to gain momentum. 

https://www.barrons.com/news/russia-ramps-up-air-naval-activity-in-ukraine-war-pentagon-01647884707

Last week, after two years of a near-zero interest rate and despite geopolitical uncertainties, the US Federal Reserve raised the interest rate by 0.25 basis points in order to fight the fastest pace of inflation in over 40 years. Price pressures, which initially affected a few categories most affected by the pandemic (semiconductors, automobiles, etc), are spilling over into the broader economy and the recent surge in commodity prices has further pushed out the timeline for the peak of inflation and normalization. Remember, last month’s CPI did not take into account the spike in oil, natural gas, and metal prices stemming from Russia’s war in Ukraine. It’s very likely March CPI numbers (due April 12) are going to be even worse. 

Acknowledging that inflation will likely stay higher for longer, policymakers have revised their forecasts higher. Inflation (as measured by core PCE) is expected to be at 4.1% this year, up from a 2.7% projection in December. By 2023, inflation is estimated at 2.6%, up from an earlier forecast of 2.3%. 

In addition to the well-telegraphed 0.25% rate hike, the Fed released its “dot plot,” which shows where individual Fed officials expect interest rates to be. The majority of Fed officials now expect seven hikes this year, four in 2023 and none for 2024. That would take the policy rate to 1.9% this year and 2.8% by the end of 2023, slightly higher than the last cycle’s peak of 2.5% in December 2018. It would also be higher than the committee’s estimate of the long-run neutral rate, suggesting policy would be slightly restrictive to growth when the Fed is done tightening.

https://www.federalreserve.gov/monetarypolicy/fomcprojtable20220316.htm

Neil Shearing, Chief Economist at Capital Economics, wrote in a note to clients, “The war has added to the squeeze on real incomes in advanced economies and caused a substantial tightening of financial conditions in Europe. But, for now, central banks remain focused on bringing down inflation and containing any second-round effects on wages and prices. This is, on balance, the correct judgment. While the economic outlook is unusually uncertain, the high starting point for inflation – and the likelihood that it will rise further – justifies a tightening of policy.” 

In prepared remarks to the National Association for Business Economics, Fed Chair Jerome Powell reiterated his commitment to fighting inflation, which he says can jeopardize an otherwise strong economic recovery. His comments sparked off a mid-day sell-off in the market, that was quickly bought up. 

Powell said, “We will take the necessary steps to ensure a return to price stability. In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.”

Moreover, Powell said of supply-chain disruptions, “It continues to seem likely that hoped-for supply-side healing will come over time as the world ultimately settles into some new normal, but the timing and scope of that relief are highly uncertain. In the meantime, as we set policy, we will be looking to actual progress on these issues and not assuming significant near-term supply-side relief.”

A basis point is equal to 0.01%. FOMC officials indicated that 25 basis point increases are likely at each of their remaining six meetings this year. However, markets are pricing in about a 50-50 chance the next hike, at the May meeting, could be 50 basis points.

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.

Highlights

  • Nike (NKE) stock rose more than 5% after-hours after reporting stronger-than-expected earnings. Here are the numbers: 
    • Revenue: $10.87 billion vs. $10.61 billion expected, $10.36 billion Y/Y
    • Adjusted EPS: $0.87 vs. $0.72 expected, $0.90 Y/Y
  • The Chicago Federal Reserve’s monthly National Activity Index fell slightly more than expected in February, reflecting a moderate deceleration in U.S. economic growth. The headline index ticked down to 0.51 for February, down from 0.59 in January. Readings of 0 are consistent with U.S. economic growth rates at the average historical trend, while readings above zero indicate growth.
  •  Warren Buffett’s Berkshire Hathaway Inc on Monday struck an agreement to buy insurance company Alleghany (Y) for $11.6 billion
  • Shares of Dow component Boeing (BA) fell Monday morning in pre-market trading after a passenger plane with more than 130 people on board crashed in China’s Guangxi province. The Civil Aviation Administration of China confirmed the crash of the Boeing 737 jet, which was operated by China Eastern Airlines.
  • Twilio today announced a new API for its Flex contact center service that combines the platform’s existing chat channels under a single umbrella to make it easier for developers to build contact center applications that are less frustrating for end-users.
  • Amid Russia’s war in Ukraine, the price of oil, wheat, steel, and other commodities resumed their march higher. 
  • Shipments of smartphones within China fell 31.8% year-on-year to 14.5 million handsets in February, the China Academy of Information and Communications (CAICT) reported on Monday. Shipments were down from about 21.3 million handsets in February 2021 and 32.4 million in January 2022, according to the CAICT, a state-backed think-tank.
  • Netflix (NFLX) announced it would be cracking down on password sharing between different households.

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