Welp, it happened
What a wild way to wake up Thursday morning to the news that Russia had invaded Ukraine. I’m sure everyone’s aware of the horrors happening on the ground, but here’s a little history lesson on why this is happening if you need a refresher. First things first, if you’re looking for a way to personally help, I donated to the UN’s Ukraine Humanitarian Fund that’s part of the UN’s crisis relief program – you can donate here. Secondly, the reaction in the market to the actual invasion was pretty crazy. Stocks started the day on Thursday down sharply but somehow reversed all losses of the day to end the day in the green. And that momentum continued into Friday.
Moral of the story: From an economic perspective, this war means we’re going to have continued inflationary pressures in the global economy because of two big things – Russia is the world’s third largest energy producer and Ukraine and Russia, together, are some of the largest grain producers in the world.
Everything else that happened this week is of little consequence compared to what’s happening in Europe, but we did see a few other scheduled economic reports this week. Probably the biggest was the January consumer spending and the Fed’s preferred inflation report – the PCE index. Consumer spending increased 2.1% in the month while incomes remained flat and prices increased 6.1% compared to the prior year. This is the steepest level of inflation, as indicated by the PCE Index, in the last four decades.
Moral of the story: A month ago, investors were betting on the central bank to raise interest rates sharply throughout the year to combat the elevated levels of inflation currently plaguing the market. Now, however, investors aren’t sure the Fed will be as aggressive. On one hand, the Russia/Ukraine conflict is going to increase inflationary pressures, but it’s also likely to slow economic growth. In that environment, if the Fed raises rates too aggressively, they will likely push us into an economic recession. The Fed’s next meeting is in March so we’ll have to wait and see what comes from that, but their job just got a whole lot harder.
Feeling the impact
Unsurprisingly, consumer confidence fell a bit in February driven by concerns on inflation (doesn’t even include the impact of the war happening on the other side of the pond). The consumer confidence index measures a few different things, including views of the economy currently and then also expectations for the future. It seems like feelings about the current situation actually improved slightly (likely a function of COVID cases coming down) but expectations for the future came down driven by concerns on inflation.
Moral of the story: The bottom line is that consumers are still pretty flush with cash from the extra savings they built up during the pandemic and the labor market is in good shape. Even though inflation is going to be a bit of a drag on consumer spending, it doesn’t seem like the main engine of our economy (consumption) is going to completely shut down anytime soon.