Commodity inflation panic – Prices of goods from wheat to nickel soared to new highs yesterday, but the most attention was given to oil, which recorded the largest daily explosion ever, when a Brent barrel soared to almost $ 140, amid reports that the US and Europe are considering banning energy imports from Russia. Disqualified such an option for Europe, and oil fell back by $ 20. But then Russia threatened to cut off gas supplies to Europe itself, and the price rose again towards $ 130.Energy prices were also pushed back by delays in nuclear talks with Iran, aggressive closing of hedge fund shortages and distress Liquidity in commodity trading In light of the disconnection of Russian banks and the loss of value of Russian commodities as collateral for transactions. On Thursday, the US inflation figure for February will be published, when it is forecast to reach a new stratosphere of 7.8%.
The Federal Reserve may succumb to inflation and at least try to prevent a recession – The surge in inflation expectations not only did not lead to a jump in interest rate expectations but on the contrary, in the last month US yields tend to decline and the market does not even give a chance that in the Fed’s upcoming policy decision, on 16/3, it will make a determined double move. The slope of the yield curve continues to flatten sharply at a rate that may cause it to roll over within a single number of months. When the Fed realizes that the battle against inflation is lost, it may succumb to it and become more moderate with rising interest rates.At least will try to prevent a recession.
Real yields crash again and it’s not enough this time to support technology stocks – The combination of rising inflation expectations in parallel with the apparent Fed surrender pushes back real interest rates to sharp falls. The 10-year real yield in the US dropped from 0.4% – a month ago to 1.1% – this morning. , After deleting over 20% of its value. For apart from low real interest rates technology companies also need growth and this will be difficult for them to achieve now. The expectation is better and more companies will update their profit forecasts downwards. By the way, it is interesting to see that cryptocurrencies behave in a higher correlation to technology stocks than to gold, which leads to rethinking what they are?
The stock market will try to find a bottom already around current levels – The futures contracts on the Wall Street indices embody continued declines even today (by about 1.2%). But the level of panic in the market is high enough to try to look for a “bottom”. The VIX fear index jumped to 36 points yesterday, a level close to those that often marked the low points in the past, such as in 2018 (VIX 36 points), in 2009 (44 points), or in 2002 (40 points ). According to Goldman economists, there are other sanctions that the West can impose on Russia and escalate the situation, but it is likely that the pressure to impose such a significant reduction due to the negative economic effects on the West, and firstly the explosion in commodity prices. Self “. But if we pass the nearest station of the VIX without the bottom the next station may only reach the VIX above 50, a level that marked the bottom in the corona crisis.
The market re-evaluates the expected inflation in the next decade Over the past two years, even as actual inflation has jumped and jumped, the market has continued to estimate that it is temporary, with US expectations for the decade ahead hovering around 2.4% most of the time. Quite a long time.On the other hand, Goldman economists think the recent events are going to lead to unprecedented strategic investments in domestic production capabilities in the U.S., both of chips and of fossil fuels. Such an initiated increase in production capacity in parallel with the cooling of the economy could lead to a reversal in the price pendulum and deep deflationary pressures in a few years.
The euro currency survived the crisis in the periphery in 2015-16, but it is not certain that a war will survive in Europe – The euro collapses against the dollar to 1.08 and close to 1.05, its low point in the crisis of the peripheral countries in 2015 (Greece, Spain, Italy, Portugal and Ireland). The architects of the bloc did not imagine that the continent would be caught up in another war, such a critical dependence on the supply of energy from a vicious dictatorship and a great disappointment among the citizens of the union from the conduct of these issues. After the Brexit more and more people are claiming that the euro currency is not helpful in anything. The European Central Bank (ECB) will meet on Thursday and publish an update of forecasts. Investors will wait to see how much they will raise their inflation forecast and how much they will lower their growth forecast. It is estimated that Europe is at risk of being the first in the world to enter stagflation.
The writer is chief economist, Phoenix-Excellence
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