by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning! We begin today’s report with a few different views about inflation, followed by an update on the Canadian trucker protest. Afterward, we give our thoughts on the Russia-Ukraine situation. International news is next, and we end with our pandemic coverage.

Inflation: The BLS reported that inflation rose 7.5% from the prior year, its fastest pace in over 40 years. Unlike previous reports, inflation was particularly broad-based, with rent, energy, and food prices all making noticeable gains. The rise in inflation has placed more pressure on the Federal Reserve to raise interest rates. The market has now started anticipating up to seven rate hikes this year, with a possible 50 bps rate hike in March. However, Fed officials have offered mixed views on the need for additional rate hikes. Richmond Fed President Thomas Barkin stated he does not see a screaming need to raise rates 50 bps in March, and San Francisco Fed President Mary Daly said an aggressive rate hike wasn’t her preference. Meanwhile, St. Louis Fed President and FOMC voting member James Bullard asserted he would like to see rate hikes reach 100 bps by July 1. 

The reluctance of the Fed to put too much emphasis on the recent inflation report may be reasonable. In January, adverse weather conditions contributed to a sharp rise in electricity prices. Additionally, much of the base effects related to last year’s reopening that pulled inflation upward will conceivably start to drag on inflation this year. Services such as airline fares, car rentals, and lodging away from home will probably show signs of deflation due to a drop in demand. Additionally, the rise in energy and autos may contribute less to inflation than it did in the previous year because of prices already being elevated. This does not mean inflation will return to pre-pandemic levels; that should not happen any time soon. However, it does suggest inflation is entering its peak stage. The market is expecting the Fed to raise rates up to five times this year, within a range of 1.25%-1.50%.

Trucker Protest: The trucker protest has entered its fourth day, and it appears that officials may intervene. On Thursday, the Mayor of Windsor, Ontario, which borders Detroit, stated police were prepared to remove the anti-mandate protesters by force if necessary. The Ontario government has sought an injunction to end the protest and plans to seize trucks and reopen the bridge. At least six auto plants have halted production as a result of this protest. The U.S. also expects its truckers to protest in solidarity with the Canadian drivers over Superbowl weekend. These protesters are expected to proceed to D.C. early next month.

Russia-Ukraine conflict:  The U.S. has escalated its rhetoric in its attempt to dissuade Russia from invading Ukraine. In an interview with MSNBC, U.S. Deputy Secretary of State Wendy Sherman stated, “body bags will come back to Moscow” if troops enter Ukraine territory. The comment comes amid rising tensions between Russia and Ukraine and has led the country to ramp up military drills. Although talks between NATO and Russia are ongoing, there doesn’t appear to be much progress.  In previous reports, we mentioned the Russia-Ukraine stalemate will seemingly end without a major conflict, but Wendy Sherman’s comment has made us less optimistic.

International news: 

• U.K. and EU officials are scheduled to meet on Friday to discuss Northern Ireland Protocol. Following a political backlash in Northern Ireland, the new round of discussions will try to improve the trading arrangement. The protocol was put in place to prevent a resurrection of a hard border between Ireland and Northern Ireland. Since the deal was made, there has been growing opposition from Northern Ireland officials. Last week, the country’s first minister, Paul Givan, resigned in protest to the rules established by the post-Brexit protocol. Negotiations have not gone well in the past, as the U.K. and EU have been unable to agree on the way goods can be transferred between Northern Ireland and mainland U.K. without border checks.
• OPEC and its allies continue to face production problems. The IEA has reported that group members have struggled to meet production pledges.  The agency reports that OECD industry oil inventories have plunged to their lowest level in seven years. Although Saudi Arabia and the United Arab Emirates, which have the sparest production capacity, could help ease oil markets, there is no sign they will. Thus, the lack of inventory could pave the way for $100 a barrel for oil.
• As the rest of the world raises rates to contain inflation, ECB President Christine Lagarde has held steadfast in her belief that higher rates are not needed at this time. She told a German publication that raising rates “would not resolve any of the current problems” and warned that it could hurt the economy and jobs. She also maintained she would only act if needed, and any moves would be gradual.

COVID-19:  The number of reported cases is 406,419,929, with 5,792,240 fatalities.  In the U.S., there are 77,437,156 confirmed cases with 915,618 deaths.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The CDC reports that 674,675,725 doses of the vaccine have been distributed with 545,477,120 doses injected.  The number receiving at least one dose is 251,655,172, while the number of second doses is 213,430,434, and the number who have received the third dose, granting the highest level of immunity, is 90,852,670. The FT has a page on global vaccine distribution.

• Hong Kong officials have requested assistance from mainland China. The region is struggling to contain an outbreak in cases and needs an additional temporary isolation facility.
• More states are starting to end mask mandates as infection rates decline. The moves come amid growing evidence that the pandemic is headed into its final stage.

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