Morning Report: Rising prices, slowing growth

Vital Statistics:

S&P futures4,322-10.2
Oil (WTI)117.161.49
10 year government bond yield 1.79%
30 year fixed rate mortgage 4.04%

Stocks are lower this morning as the war in Ukraine continues. Bonds and MBS are up. US Treasuries are rallying, and the German Bund went negative in the overnight session

Western economies are considering an embargo on Russian oil. Since Russia is the third largest producer of oil behind the US and Saudi Arabia, this will push up prices and compound the inflation issue.

Most of the United States relies on West Texas Intermediate oil, which in theory should be unaffected by events in Russia. The East Coast refineries do get oil from international markets, however that could come from any number of sources. I think Hawaii uses Russian oil, which makes sense geographically. Ramping up production in the US will take some time, and at the moment you cannot raise capital for E&P projects.

It isn’t just oil that is rallying: Base metals like copper, aluminum and zinc are climbing, and wheat is limit up yet again. Take a look at the chart of wheat below. See those flat lines for the past two trading days? That means the contract was limit up. The commodity exchanges put daily limits on how far a price can move. This means that prices would be higher absent these limits.

Rising food prices are being driven by something most of us never think about: fertilizer. Fertilizer prices have tripled over the past year.

Rising markets attract fast money, and you have to imagine institutions investors are raising money for commodity funds hand over fist right now. Which will lead to higher commodity prices going forward.

So, rising commodity prices. What about labor?

The labor economy remains strong, according to Friday’s Employment Situation Report. Nonfarm employment rose 678,000, while the unemployment rate fell to 3.8%. Leisure and hospitality reported the biggest increase in payrolls. Average hourly earnings rose 5.1%.

The Atlanta Fed’s GDP Now estimate sees Q1 growth at 0%.

So what does this all mean with interest rates? My guess is that the Fed is going to increase rates to quell inflation, but with growth hitting the wall, the yield curve will flatten. So we could see a higher Fed Funds rate, but long term rates, such as mortgages could move up much slower. In other words, if the Fed raises the Fed Funds rate 100 basis points this year, I don’t think we will see a 100 basis point increase in mortgage rates.

Author: Brent Nyitray

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

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