by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Optimism about a possible increase in Saudi oil production boosted S&P 500 futures this morning; however, relatively weak private payroll numbers have led to some moderation. Today’s report opens with an overview of the Federal Reserve Beige Book. Next, we give an update on the war in Ukraine. Afterward, we review U.S. economic and policy news and international news. We close with our COVID-19 coverage.

 The Beige Book: All 12 of the Federal Reserve districts remain in expansion, according to the Federal Reserve Beige Book. The publication provides an update on economic conditions for each of the Fed’s regions. Although most areas showed solid growth, four districts reported a moderate slowdown. This weakness in growth was related to consumer pushback against higher prices. That being said, all regions indicated that the labor market remained tight, with half of the districts reporting that firms still have pricing power.

• The latest JOLTS report reinforces the views shared in the Beige Book. In April, Job openings dropped 455,000 from the prior month to 11.4 million. There are almost twice as many job openings as there are available workers. However, the tight labor market suggests that the Federal Reserve still has a long way to go to bring the job market back into equilibrium.
• In other Fed-related news, the Federal Reserve is set to start shrinking its balance sheet this month as it looks to tighten monetary policy to curb inflation. By reducing its holdings of bonds, the Federal Reserve would allow credit spreads to widen, thereby dampening the attractiveness of risky fixed-income securities.

 Russia-Ukraine update: Russian forces are on the verge of taking over two-thirds of the city of Severodonetsk in the eastern region of Luhansk, while, the Ukraine counteroffensive in the northern parts of the country is getting closer to cutting off some of Russia’s supply lines. In other news, the West is still struggling to reach a consensus on how to secure another sanctions package against Moscow. In Europe, Hungary’s insistence that it should be able to sell the Russian oil it refines has led to a deadlock in talks. Meanwhile, officials with the Biden administration are hesitant to include secondary sanctions in its next package due to fears that it will hurt the economy.

Disputes over how to further punish Russia for its invasion of Ukraine highlight the war’s growing divisiveness. Western countries were willing to support Ukraine at the start of the conflict because the war did not adversely impact their constituents. However, as the cost of the war becomes more widespread through higher energy and food prices, Western leaders’ willingness to go to bat for Ukraine is waning. This is seen in the decision by France and Germany to hold talks with Putin over ending Russia’s blockade of the Black Sea.  We suspect European countries, in particular, would like to see this war end sooner rather than later. Nevertheless, we do not think the West is ready to pull its support anytime soon.

At this moment, the West and Russia have both dug in their heels and have no obvious way out of this conflict over Ukraine. The West does not want the world to believe that it is not prepared to back its allies; meanwhile, Russia does not want to appear weak to its rivals. As a result, it is unlikely that either side will divert from its current path without a sudden change in leadership. In other words, barring Putin’s ousting or significant shift in any of the major Western governments, this war will likely persist. We suspect that the environment will continue to have an elevated risk as rising prices, tightening financial conditions, and increasing global uncertainty hinder global growth.

 U.S. economic and policy news

• The U.S. and Taiwan agreed to build closer trade ties. The U.S. decision to build a relationship with Taiwan was partly due to wanting to ensure the region remains autonomous and promote its Indo-Pacific Economic Framework.
  • Although we have mentioned the U.S. uses the economic framework to build closer relationships with other Pacific countries, it is not Washington’s only aim. The U.S. believes the current trade rules established by the 1994 GATT agreement are outdated, and the Indo-Pacific Economic Framework looks to update these guidelines. The Biden administration’s goal is to modernize global trade by establishing rules on digital trade, promoting clean energy initiatives, and improving labor rights.
• Officials within the Biden administration are considering a cap on Russian oil prices. This decision would limit energy revenue for Moscow while also easing some of the supply pressures.
• The Atlantic hurricane season started on Wednesday, and forecasters predict that there will be an above-average number of tropical storms for the seventh consecutive year. The U.S. National Weather Service expects over 21 storms; the average is 14. Tropical storms have led to a surge in commodity prices.

International news

• The U.K. government will allow food makers to use sunflower oil alternatives without changing labels.
• Saudi Arabia has stated that it is prepared to pump more oil if Russian production falls. The move comes after several OPEC countries have debated suspending Russia from the oil production deal, given that sanctions have undercut the country’s ability to meet production targets.
  • Saudi Arabia’s decision to pump more may be related to President Biden’s trip to the Middle East. The president is expected to meet with Saudi Crown Prince Mohammed bin Salman (MBS) during the visit. The two have not yet met due to the prince’s rumored involvement in the killing of Washington Post journalist Jamal Khashoggi. On the campaign trail, Biden stated that he would make Saudi Arabia a pariah in response to its involvement in the murder; however, the war in Ukraine has forced the president to backtrack.
    • Biden’s agreement to meet the MBS suggests the political cost of the war has risen to a level that the president believes is unsustainable for him and his party to remain in power. Thus, the reversal is a sign that the Biden administration is starting to factor in the political cost of the Ukraine war.
  • Croatia is set to join the Eurozone in 2023. The European Commission ruled that the country has met all the criteria needed to join the bloc. As a result of its admission into the Eurozone, Croatia will likely become a more attractive destination for foreign direct investment.

 COVID-19:  The number of reported cases is 530,617,830, with 6,294,337 fatalities. In the U.S., there are 84,440,566 confirmed cases with 1,007,682 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 744,812,955 doses of the vaccine have been distributed, with 586,008,740 doses injected. The number receiving at least one dose is 258,655,540, the number of second doses is 221,350,544, the number receiving the first booster is 103,535,610, and the number receiving the second booster is 14,066,061. The FT has a page on global vaccine distribution.

• As the U.S. deals with the current surge in COVID-19 cases, research suggests that new variants of the omicron virus will likely cause new waves throughout the summer.
• Pfizer has requested the FDA to clear its vaccine to be authorized for emergency use in children under 5.
• In a setback, Hong Kong has revived COVID-19 restrictions to contain the spread of new sub-variants of Omicron. Patients with mild infections and close contacts will be forced into centralized quarantine.

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