Stocks fell this morning as the market’s choppy price action continued. Before the open, the February Consumer Price Index (CPI) was released, revealing a 7.9% year-over-year (YoY) rise in the cost of consumer goods and services. This met the consensus estimate (+7.9% YoY expected) and represented a new 40-year high.
Used cars mercifully dropped 0.2% month-over-month (MoM) but remain up 41.2% YoY. Food prices increased by 1.0% MoM as well.
Energy commodities, meanwhile, surged 6.7% MoM and were the largest contributor to last month’s inflation gain. Fuel oil was up 43.6% YoY.
“The inflation situation is getting worse, not better. Household staples are becoming more and more expensive, crowding out spending on discretionary categories and delaying the spending reallocation back to services. And while gas prices explain much of the story, food and housing prices were also key drivers in February,” explained Morning Consult’s chief economist, John Leer.
“Unfortunately, the war in Ukraine will make it more difficult to get inflation under control. Gas and energy prices continue to rise, wheat prices are through the roof, and supply chains remain in chaos.”
WTI crude oil prices (the US benchmark) climbed 8.75% last month, which we predicted several weeks ago would lead to a large CPI increase. And that’s exactly what happened.
But moving forward, if oil prices remain where they are, March’s CPI print has the potential to be far “hotter” than February’s.
WTI crude is already up over 13.5% this month, even after falling from its peak two days ago. Many investors seem to think that this sudden rise in oil prices is temporary, and that it will go away after the war in Ukraine ends.
The reality, though, is that elevated oil prices are likely here to stay, regardless of whether Ukraine and Russia can make peace any time soon.
“I don’t think that sanctions are going to go away,” said G-Squared Private Wealth founding partner Victoria Greene yesterday.
“The world is […] angry at this situation. So, let’s say miraculously we get a ceasefire tomorrow, I think the general shrinkage and the issues with supply chains are going to be a sticky situation for the rest of the year.”
Still, peace in Ukraine would certainly calm the market, which has grown increasingly volatile since the conflict began. Hopes for peace yesterday sent commodities scorching lower, giving equities some room to rise in response.
But today, those hopes were dashed after Ukraine Foreign Minister Dmytro Kuleba reported that negotiations between Russia and Ukraine had failed.
Kuleba went so far as to say that Russian leaders in Moscow “live in their own reality.” Ukraine negotiators accused Russian military forces of intentionally targeting civilians.
Russia Foreign Minister Sergey Lavrov denied the allegations vehemently, adding that it was “not the first time we’ve seen shouting in response to ‘so-called atrocities.’”
Tensions continue to flare in Ukraine as a result. And that’s not good for investors, especially with a March rate hike approaching and inflation still looking “red hot.” That’s not to say the ongoing, market-wide correction will continue, however.
Anything’s possible. Like a far weaker-than-expected rate increase by the Fed, for example.
But recent events do suggest that volatility will remain until Fed Chairman Jerome Powell speaks in his post-FOMC press conference on March 16th, which is shaping up to be a truly critical moment for traders with the major indexes so far below their record highs.
