Market in brief
All three major indexes started the week down. The NASDAQ lost 2.18%, the Dow fell 1.19% and the S&P 500 lost 1.69%. The ten-year Treasury yields climbed 2.75% for the first time since March 2019 after the Federal Reserve last week signalled sharp rate hikes and a balance sheet reduction to curb price pressures.
“Equity markets retreated on another surge in Treasury yields amid prospects for aggressive monetary policy tightening,” noted Wells Fargo analysts, adding that the war in Ukraine and China’s COVID-19 lockdowns “also clouded the economic outlook.”
US inflation for March, to be released on Tuesday, is expected at an “extraordinarily high” level, White House spokeswoman Jen Psaki warned on Monday.
Despite opening higher, Wall Street closed Tuesday session lower as investors worried about rising inflation in the United States. The Dow, which was up more than 1% at the start of the session, ended down 0.26%, the NASDAQ lost 0.30% while the S&P 500 lost 0.34%.
“The stock market was up for most of the day and then turned around. I suspect that investors have taken money off the table as we approach the start of the earnings season with the banks on Wednesday,” added Peter Cardillo of Spartan Capital, pointing out that banking stocks plunged at the end of the month.
For Kathy Lien of BK Asset Management, the markets were first interested in “underlying inflation deemed rather benign, but then focused on the fact that the American Central Bank (Fed) made it clear that it was going to drastically raise rates next month.”
Wall Street closed Wednesday session higher; the Dow advanced 1.01%, the NASDAQ gained 2.03% and the S&P 500 was up 1.12%.
Wednesday’s strong performance comes as corporate earnings numbers are more significant than usual for investors as they are closely monitoring company data to try to better understand how they are managing inflationary pressures.
Delta filed on Wednesday strong quarterly results showing that despite rising prices, consumers will continue to fly. This news supported other stocks from the travel sector; American Airlines jumped 10.6%, Southwest Airlines advanced 7.5%, Expedia 4.9% while Carnival Corporation gained 5.4%.
Wall Street opened in scattered order on Thursday; the Dow gained 0.5%, the S&P advanced 0.2% while the NASDAQ opened flat. Twitter opened 4% higher after Elon Musk announced his plans to acquire the company and then pull it off Wall Street. Markets will be closed on Friday to celebrate Good Friday.
Oil
The drop in demand from China continued to put pressure on oil prices on Monday, which fell below $100. International benchmark Brent fell 4.18% to $98.48 a barrel while WTI fell 4.04% to $94.29 a barrel. Several stocks from the energy sector also ended the session down: Exxon Mobil lost 3.44%, Chevron lost 2.57% while Occidental Petroleum fell 6.28%.
On Tuesday, the World Petroleum Organization announced that it had lowered its demand forecast. “Global economic growth for 2022 is revised down to 3.9% from 4.2% for the previous month’s estimate. This considers the impact of the conflict in Eastern Europe, as well as the lingering effects of the COVID-19 pandemic, with risks that seem to have been reduced for the latter” indicates OPEC in its report of April.
“From a global point of view, considering that most countries have relaxed their covid containment measures, oil demand has seen strong growth of almost 5 mb/ j during the first quarter of 2022, compared to the same period last year,” specifies OPEC.
“However, given recent geopolitical developments in Eastern Europe, the second and third quarters of 2022 should see growth of 3.5 mb/d compared to the same periods of last year,” estimates the OPEC in an article devoted to the outlook for the coming summer.
“Political tensions in Eastern Europe are expected to shift supply to other regions” and thus “support refinery supplies in these regions,” adds the organization.
“Given the current uncertainty surrounding recent developments, geopolitical unrest and the outlook for the summer months, the countries participating in the ‘Declaration of Cooperation’ continues to reaffirm their unwavering commitment to support oil market stability by ensuring an adequate supply of crude oil to the world market,” she explains.
OPEC also warned that it would be impossible to make up for lost supply if an EU embargo against Russia happens. Supply continues to suffer as rough stocks decline. In addition, the pandemic has slowed investment in the oil fields of a few OPEC member countries, thus decreasing production.
The price of a barrel of oil jumped 6% on Tuesday, helped by the easing of sanitary measures in China allowing to support demand while the confinement in the country deprived of a million barrels of crude oil per day of the world demand. “The market has been elated that the city of Shanghai is sort of on its way to being operational again. This will put an end to a strong destruction of oil demand,” Robert Yawger of Mizuho USA told AFP.
U.S. Inflation
Inflation has hit its highest peak in 40 years in March, according to the Consumer Price Index (CPI) released Tuesday by the Labor Department. Prices rose 8.5% year on year, compared to 7.9% in February. Thus, over one month, inflation stood at 1.2%, against 0.8% in February. The cost of food, gasoline, housing, and several other necessities is eating away at the pocketbooks of American consumers, wiping out the pay raises many people have received during the pandemic.
The March numbers are the first data released following Russia’s invasion of Ukraine; a war that is creating even more volatility in an economy already weakened by the pandemic. Escalating energy prices has led to higher transportation costs for shipping goods and components across the economy, which in turn has contributed to higher prices for consumers. In one year, gasoline prices have increased by 48%, the cost of used cars has risen by 35.3%, the prices of bedroom furniture are up by 14.7%, those of jackets, suits, and coats for men, 14.5%.
“Slower core-good inflation is partly offset by higher services inflation, underscoring the challenge the Fed faces in taming price pressures even if supply and demand in the goods sector were to balance. The Fed needs to hike rates expeditiously, but if goods demand continues to cool, they may not need to hike as aggressively as the market — now pricing in almost three 50-bps rate hikes this year — currently expects” said Anna Wong and Andrew Husby, economists.
Despite the latest data, the economy remains robust as the unemployment rate continues to decline. “Your family’s budget, your ability to refuel, none of that should depend on a dictator declaring war and committing genocide on the other side of the world,” said the American president Joe Biden. The latter announced on Tuesday a series of initiatives aimed at slowing the rise of inflation.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
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