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Title: Debate on Fed's Ability to Engineer a Soft Landing
The debate on whether the Federal Reserve (Fed) will be able to engineer a ‘soft landing’, bringing down inflation without major economic bump, or a ‘hard landing’, hiking too much tipping the economy into recession, is ongoing. A third scenario, ‘No Landing’, is now making its way into the conversation. In this scenario, the U.S. economy doesn’t slow down, inflation remains above-trend, and the Fed is forced to not only hike rates by more than expected, but keep them elevated for longer. This uncertainty is not likely to prove fertile ground for risk assets to flourish.
The recent jobs report has played a big role in stoking the ‘no landing’ scenario, showing robust job gains and a drop in the unemployment rate to 3.4%, a five-decade low. This has dealt a blow on bets for a near-term recession, but also flagged worries about upside risks to inflation that would likely spur the Fed to go further on rate hikes and keep policy tighter for much longer.
Traders are currently pricing in at least one more quarter point hike, while the odds for a May rate hike are gaining traction. Former Treasury Secretary Lawrence Summers has cited upside risks to inflation, and investors continue to believe in the goldilocks, or soft-landing scenario. However, a stickier path for inflation at a time when markets are betting against the Fed, and the central bank has been keen to highlight that the disinflation process has started, would risk the Fed’s credibility and spur fresh uncertainty.
Signs are emerging that the disinflation, driven mainly in the goods sector, may prove transitory. Used-car prices unexpectedly climbed 2.5% last month, the most since the end of 2021, though that was driven by unseasonably strong demand. Data in the coming days is expected to show a resilient consumer and price pressures that are on up, and up.
Overall, the sentiment of this paragraph is negative, as the ‘no landing’ scenario is seen as a risk to the market and the Fed’s credibility. The data in the coming days is expected to show a resilient consumer and price pressures that are on the rise, which could lead to the ‘no landing’ scenario becoming more likely.
Title: Oil Markets Jump as Russia Announces Production Cuts and Price Structure
Oil markets jumped 2% on Friday as Russia announced production cuts and its own minimum price structure in response to the G7's price caps. Russia will cut oil production by 500,000 bpd, or barrels per day, in March, with the Kremlin also planning to set a fixed $20 per barrel differential for its Urals crude to dated contracts of global benchmark Brent for “tax purposes”. The G7+ responded swiftly to the Russian announcements, cautioning about the possibility of Moscow trying to pull off a stunt.
The U.S. Treasury Department has said that it wants to limit what the Kremlin can earn per barrel in order to squeeze Moscow’s funding for the war in Ukraine, while ensuring Russian oil supplies reach markets that need them. New York-traded West Texas Intermediate, or WTI, crude for March was up $1.66, or 2.1%, at $79.72 per barrel, while London-traded Brent crude for March delivery finished the regular session up $1.89, or 2.2%, at $86.39. For the week, the U.S. crude benchmark was up almost 9%, overwriting last week’s 7.5% plunge, while Brent was up 8% on the week, erasing last week’s 7.5% decline.
Oil prices have been rebounding this week on the premise that Chinese refiners would add exponentially to imports this month as the country returns from the long Lunar New Year break and into an environment free of COVID-19 restrictions which had previously hampered demand. However, large builds across the board in crude, gasoline and distillates in the Weekly Petroleum Status Report released by the U.S. Energy Information Administration on Wednesday ran counter to the bullish sentiment.
Overall, the sentiment in the oil markets is positive as Russia's production cuts and price structure have pushed up prices. The G7+ is wary of Russia's announcements, but the U.S. Treasury Department is still looking to limit what the Kremlin can earn per barrel in order to squeeze Moscow’s funding for the war in Ukraine. Chinese import data will likely not emerge for weeks, but the current sentiment is positive as oil prices have been rebounding this week.
Title: Mixed Market Performance as Fed Hikes Weigh on Growth Sectors
The Dow Jones Industrial Average rose 0.5% on Friday, driven by a surge in energy stocks, but still ended the week down 0.2%. The Nasdaq and S&P 500 also ended the day down 0.6% and 0.2% respectively. The jump in Treasury yields and bets on a more hawkish Federal Reserve cooled the rotation into growth sectors including tech, with Alphabet (NASDAQ:GOOGL) ending the day flat and semiconductor stocks, such as Nvidia (NASDAQ:NVDA), falling more than 4%.
Earnings reports from Lyft Inc (NASDAQ:LYFT) and Expedia (NASDAQ:EXPE) also weighed on sentiment, with both companies reporting revenue guidance that fell short of estimates and a surprise quarterly loss. Lyft's stock tumbled more than 36%, its biggest single-day decline, while Expedia's shares fell more than 8%.
Energy stocks, however, were supported by rising oil prices after Russia said it would cut production by 500,000 barrels per day next month. Goldman Sachs also cut its 2023 price target on Brent crude by $5 to $75 per barrel, citing a 1.1 mb/d rise in China demand this year.
Tesla Inc (NASDAQ:TSLA) fell 5% after investor Ross Gerber said he will pursue a seat on the electric carmaker's board due to frustrations about the company's lack of marketing and public relations efforts.
Overall, the market performance was mixed on Friday, with the Dow ending higher but the Nasdaq and S&P 500 closing lower. Renewed concerns of Fed hikes and weaker than expected earnings reports from Lyft and Expedia weighed on sentiment on growth sectors like tech, while energy stocks were supported by rising oil prices. The sentiment on Tesla Inc was also negative due to investor Ross Gerber's frustrations about the company's lack of marketing and public relations efforts. This sentiment is negative.
Title: U.S. F-22 Fighter Jet Shoots Down Unidentified Object in Alaska
On Friday, a U.S. F-22 fighter jet shot down an unidentified object flying high over Alaska. The object, which was about the size of a small car, was downed by a Sidewinder missile. White House spokesperson John Kirby stated that it was unclear where the object had originated from. President Joe Biden ordered the shootdown, which was announced from the White House.
This follows the shootdown of a Chinese surveillance balloon off the coast of South Carolina last week. China's government has claimed that it was a civilian research vessel. Some lawmakers criticized the president for not shooting down the Chinese balloon sooner, as the U.S. military had recommended waiting until it was over the ocean out of fear of injuries from falling debris.
The Pentagon and the White House declined to give a detailed description of the latest object, saying only that it was far smaller than the Chinese balloon. U.S. officials declined to speculate about what the object might be, even after a day of observation, raising questions about what kind of object could be so difficult to identify by experienced U.S. pilots and intelligence officials.
The Pentagon said it was first detected on Thursday using ground radars and F-35 aircraft were then sent to investigate. The UFO was flying at about 40,000 feet (12,190 meters) in a northeasterly direction, posing a risk to civilian air traffic. The object was shot down off the coast of northeastern Alaska over frozen U.S. territorial waters near the Canadian border.
Brig. Gen. Patrick Ryder, the Pentagon's chief spokesperson, stated that American pilots who flew alongside the latest object before it was downed determined that no human was aboard. He added it was incapable of maneuvering and did not resemble an airplane. After the shootdown, some lawmakers praised Biden, with Senator Mark Warner, chair of the Senate Intelligence Committee, saying he was glad to see the president act swiftly on this new intrusion to our airspace.
Overall, the sentiment of this summary is positive. The U.S. military was able to successfully shoot down an unidentified object flying over Alaska, and President Joe Biden was praised for his swift action. The Pentagon was also able to determine that no human was aboard the object, and that it was incapable of maneuvering and did not resemble an airplane. The shootdown also raised questions about what kind of object could be so difficult to identify by experienced U.S. pilots and intelligence officials.
Title: ECB Must Avoid Excessive Rise in Real Interest Rates
The European Central Bank (ECB) must be careful to avoid pushing real interest rates too high, given the level of private and public debt in the euro area, according to Ignazio Visco, a top Italian policymaker and ECB Governing Council member. Since July, the ECB has raised interest rates by 3 percentage points and promised a 50 basis-point hike for March. Visco believes that the credibility of the ECB's actions is preserved not by flexing their muscles in the face of inflation, but by continually showing wisdom and balance. Investors and economists have focused on a peak in the deposit rate of between 3.25% and 3.5%, which suggests just one or two moves after the March hike and an end by mid-year.
Inflation has dropped by around 2 percentage points since its peak in October, and further falls are likely as natural gas prices retreat. However, underlying price growth appears to be stubbornly high leading to fears that inflation could get stuck at levels above the ECB's 2% target, partly due to rapid nominal wages growth. Visco believes that there are no compelling reasons for inflation not to return to target, and that the persistence of inflation in many countries during the 1970s is very unlikely to be repeated.
Overall, this paragraph has a positive sentiment as it emphasizes the importance of the ECB being careful to avoid pushing real interest rates too high and the need to continually show wisdom and balance. Visco also believes that there are no compelling reasons for inflation not to return to target and that the persistence of inflation in many countries during the 1970s is very unlikely to be repeated.
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