Sightline Weekly Market Update: Geopolitical Concerns and Inflation Bring Market Volatility
The constant barrage of Russian news on the anticipated invasion of Ukraine, high inflation, and economic reports weighed heavily on equity markets for the second consecutive week. Large caps suffered the brunt of the declines, with the Dow Jones 30 pulling back 1.9%, only topped by the TSX, which fell 2.5% as the oil price declined 2.9% on the week. The S&P 500 lost 1.58%, the Nasdaq 1.76% with the S&P400 MidCap and Russell 2000 falling 0.56% and 1.03% respectively. European equities did not escape the havoc of Ukrainian tensions and lack of clarity around monetary policies. The STOXX Europe 600 Index finished the week declining 1.86%, but the German DAX suffered more than other country indices falling 2.48%. The French CAC 40 Index fell 1.17%, the UK’s FTSE 100 declined 1.92%, and Italy’s FTSE MIB Index lost 1.70%.
On Monday, markets were rattled by comments from St. Louis Federal Reserve President James Bullard in an interview with CNBC where he made a case for “front-loading more of our planned removal of accommodation than we would have previously.” Further, he stated that committee members were surprised by the upside of inflation and that “our credibility is on the line here, and we do have to react.” In his view, a total 1% increase in the Fed short-term borrowing rate by July is appropriate, and he aims to convince his colleagues. The market response suggested a 0.50% increase at the March meeting.1
On Tuesday, the Department of Labor released the Producer Price Index for January, reporting the index for final demand increased by 1.0%. Final demand prices rose 9.7% for the 12 months ending January. The final demand for services increased by 0.7%, the same as the previous month. In January, a surge in costs for hospital outpatient care, food, and autos is evidence of persistent and increasingly embedded inflationary pressure giving ever-increasing impetus towards a more aggressive Fed policy.2 On Wednesday, the Commerce Department released the advance estimates of retail sales and food services for January, not adjusted for inflation, reporting an increase of 3.8%, with online shopping contributing the lion’s share of the rise.3 The Dow Jones estimate was for a 2.1% increase. Since 2018, January retail sales have increased after December, suggesting there could be a flaw in the seasonal adjustments.4
In a separate report, the Federal Reserve reported industrial production rose 1.4% in January, higher than the 0.5% forecast survey by the Wall Street Journal. Manufacturing increased by 0.2%, industrial production increased by 1.5% excluding autos, and motor vehicles and parts fell 0.9%. Utilities jumped 9.9% with the January deep freeze. Capacity utilization increased by 1% to 77.6% from December’s reading of 76.6%. January’s reading is the highest reading since early 2019.5
On Thursday, the Commerce Department reported last week’s initial jobless claims rose by 23,000 to 248,000. Continuing claims for all programs decreased by 36,295 to 2,063,567. As reported in previous weeks, with close to 11 million jobs remaining unfilled, initial claims are expected to decline over time as businesses try to avoid layoffs in one of the tightest labor markets in decades.6 On Friday, the Conference Board Leading Economic Index for the US showed a slight decline for January. The January reading incorporates annual revisions to the composite indexes. The 0.3% decrease follows a 0.7% increase in December and 0.8% increase in November and reflects recent stock price declines, consumer confidence, and the average workweek in manufacturing. The latest reading is the first decline since February of 2021.7
As the geopolitical tensions, inflation concerns and central bank responses remain front and center in investors’ minds, we expect continued volatility over the next several weeks.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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