Morning Report: Russia invades Ukraine

Vital Statistics:

S&P futures4,123-92.2
Oil (WTI)99.917.23
10 year government bond yield 1.87%
30 year fixed rate mortgage 4.2%

Stocks are lower this morning after Russia invades Ukraine. Bonds and MBS are up.

The action in the markets is pretty dramatic this morning, with the 10 year yield falling 10 basis points. Actual bond prices are up over a point, but MBS are up about half a point. Stocks are getting clobbered, and anything oil-sensitive like airlines are getting whacked. The NASDAQ 100 has entered bear market territory, falling 20.5% since late December.

We have a lot of Fed-Speak this morning. I doubt anyone will be revising their remarks on what is happening overseas, but this situation for the Fed has become quite fluid.

Oil is up big this morning, with West Texas Intermediate up 8% and North Sea Brent trading up 7.6%. Brent is trading over $100 a barrel. Natural gas futures are up big as well. None of this bodes well for gasoline prices going forward as refineries are about to switch over from producing heating oil to gasoline for the summer driving season.

The action in commodities puts the Fed in a bind since it becomes harder for them (and central banks worldwide) to engineer a soft landing. Rising commodity prices will increase inflation, however it will also depress the economy. The stagflation case is bolstered by what is going on. The Atlanta Fed GDP Now estimate has 1.3% growth in Q1, however rising gas prices translate into lower consumer spending and lower GDP growth.

The Fed Funds futures have dramatically shifted in March, with the futures now predicting a 87% chance of a 25 basis point increase and a 13% chance of 50 basis points. Given the uncertainty, I think the prediction of 150 basis points in hikes this year is probably going to get trimmed back.

The main takeaway is that the bond market will be driven by global risk on / risk off sentiment than economic numbers as long as this crisis lasts. MBS will probably lag any improvement in rates as the Fed’s tapering will be the dominant factor. Fortunately for mortgage bankers, this means we probably won’t have a repeat of the margin calls of 2020, even if rates move lower since the Fed won’t be buying. I suspect mortgage spreads will just widen as the 10 year yield falls and mortgage rates go nowhere.

Fourth quarter GDP was revised upward from 6.9% to 7% however personal consumption expenditures were revised downward. I suspect much of this growth is inventory build as supply chains catch up with demand.

New Home Sales continue to disappoint, as Jan sales came in at a seasonally adjusted annual rate of 801,000. This is 4% lower than December’s rate and 19% lower than a year ago. The median new home price came in at 397k, which is up 18% from a year ago.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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