by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report begins with the latest developments from the Russian invasion. We then discuss central bank news with a focus on the Fed meeting minutes. Next, we review economic and policy news, followed by a brief roundup of international news. We conclude with our COVID-19 coverage.

Russia has focused its war efforts on taking over the eastern region of Ukraine. So far, they have started air attacks on the eastern parts of the country as Russian forces attempt to encircle Ukrainian troops. A Ukrainian official has warned residents remaining in the area that time is running out for them to evacuate. The change in strategy suggests that Russia is desperate for a military win. In 2014, Russian President Vladimir Putin boasted Russia could take Kyiv in two weeks.  It has been 42 days since his forces invaded Ukraine, and they have yet to take a major city. With this new offensive, we suspect Russia could be targeting areas where there is a lot of pro-Kremlin sentiment, such as Donetsk and Luhansk. Military victories in these cities would be hard to overturn, given the area’s sizable Russian population. However, if Russia fails to take control of these areas, it would be a major blow not only to its military’s reputation but also to troop morale. Therefore, Moscow may view winning the east as its only option. If forces are successful, we expect a revamped military effort to take over Kyiv.

Other Ukraine related news

• Russia continues to find it difficult to avoid the pain of sanctions. In China, state oil refiners are reluctant to purchase oil from Russia over concerns about violating sanctions. Refiners have continued to honor their contracts, but they have been hesitant to sign new ones even with the steep discounts. The cautiousness comes as foreign firms have been wary of giving off the appearance of helping Moscow avoid sanctions. Recently, Shell (SHEL, $55.30) announced that it would be exiting Russia. Although the U.S. has not explicitly told foreign firms to choose between it or Russia, this does appear to be the underlying fear of firms willing to work with Moscow. On Thursday, the U.S. warned India of “significant and long-term” consequences if it continues to align itself with Russia. India has maintained that it has not aligned with any country over the invasion.  Despite its stance, India is increasingly finding it difficult to justify remaining neutral in light of the evidence of atrocities in Ukraine.  At the UNSC meeting on the Russia-Ukraine war, India has called for an investigation into the killing in Bucha, its strongest condemnation of Russia since the conflict began.
• Russia still has some buyers for its goods. In Hungary, Prime Minister Viktor Orban stated that his country was willing to pay for Russian gas in rubles. Hungary is the first European Union member country to agree to Putin’s terms. Meanwhile, Russian officials announced it has sold out of Sokol crude for May, with ships expected to head to China, India, Japan, and Korea.
• Regardless of sanctions, the ruble was briefly able to return to its pre-war levels. Even though the recovery is impressive, it is likely not a sign of growing confidence in the currency. After the Kremlin reopened its markets, it forced restrictions on how the currency is traded. For example, exporters were limited in their ability to accept other currencies for payments, residents were discouraged from saving in other currencies, and foreigners were not allowed to sell their securities. Under normal market conditions, the currency would likely have seen at least a slight improvement, especially after the initial shock of the Russian invasion wore off, but it probably would not have been as strong as what we are currently seeing. That being said, a part of the appreciation in the currency could be related to countries holding on to rubles in case Putin follows through on his threat to stop supplying countries that pay in other currencies.

Central bank news

On Wednesday, the Federal Reserve released the minutes from its two-day meeting on March 15-16. The minutes showed that despite the FOMC voting to raise rates 25 bps, “many” members favored raising rates by 50 bps. Russia’s invasion of Ukraine helped sway the FOMC from pushing rates higher. As a result, there is growing speculation that the Fed will make up for lost time by raising rates 50 bps in the May and June meetings. The minutes also revealed that the Fed would like to start reducing its bond holdings in May with a cap of $95 billion a month. The notes from the meeting suggest the Fed could phase in the drawdown to ensure a smooth transition.

Financial markets responded negatively to the minutes. There was a sell-off of stocks and bonds as investors prepared for more market volatility. As a result, there are expectations that the Fed will push rates above two percent by the end of the year.  In our view, the Fed may still be open to changing course on its policy path if next month’s CPI report shows that inflation peaked in February. We believe the recent rise in energy prices due to the war in Ukraine will likely make any deceleration in inflation modest at best. However, if inflation rises even higher than it did in February, we expect the Fed to become decidedly more hawkish than they are today.

• The ECB is mulling raising rates soon as inflation in the Eurozone remains elevated and shows no signs of abating.

U.S. economic and policy news

• The U.S. appears to be exploring more ways to punish Russia and countries that align with it. Treasury Secretary Janet Yellen expressed interest in creating an escrow account that could track proceeds from Russian oil and gas sales. She also added that the U.S. Treasury Department is prepared to use its tools on China if it were to make a move on Taiwan.
• House Representative Nancy Pelosi (CA-D) is rumored to be traveling to Taiwan following her stay in Japan this weekend. The visit has not been confirmed by her office, but Chinese officials have already expressed outrage. Beijing warned that if Pelosi does visit Taiwan, it would be forced to take strong measures. The vague threat comes amid growing friction between the U.S. and China over the Russian invasion of Ukraine.

International news

• Following the retirement of Hong Kong leader Carrie Lam, Beijing is reportedly backing former police officer John Lee as her replacement. The choice suggests that Beijing still sees Hong Kong as a security risk.
• Russian oil refiners Taif and Lukoil (LUKOY, trading halted) stated they are running out of fuel storage capacity as they cope with the lack of demand for oil due to sanctions.
• The EU is set to ban Russian coal starting in August as it looks to cut ties and reduce its dependence on the country because of the invasion of Ukraine.

COVID-19: The number of reported cases is 495,181,447, with 6,166,970 fatalities. In the U.S., there are 80,249,038 confirmed cases with 983,817 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 707,281,045 doses of the vaccine have been distributed with 563,391,773 doses injected.  The number receiving at least one dose is 255,873,739, while the number of second doses is 218,043,500, and the number of the third dose, granting the highest level of immunity, is 98,312,742. The FT has a page on global vaccine distribution.

• A new study showed there is an increased risk of developing blood clots months after experiencing mild COVID infections.
• Leading infectious disease expert Anthony Fauci stated he expects the latest omicron variants to spread into the U.S., possibly leading to a serious surge in cases in the fall.

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