Newsletter: March 2022

by | Mar 18, 2022 | Newsletter | 0 comments

Macro Overview

Geopolitical rifts emulating from the Russian invasion of Ukraine roiled financial and commodity markets globally as uncertainty arose surrounding the extent of the conflict. Ramifications from the conflict could take months or longer to unfold, as imposed sanctions on Russia may ripple through the global economy affecting energy, technology, and food industries.

Inflation rose to a 7.5% annual rate for the month of January, the highest since February 1982, influencing the direction of interest rates across a multitude of consumer loans. There is growing hesitation about such reliance on lagging inflation data since leading economic indicators are starting to signal a slowdown in various areas. The Ukrainian conflict may add to near-term inflationary pressures, yet derail economic momentum as various energy sensitive industries face higher costs.

Russia is currently the world’s third largest exporter of oil and third largest wheat producer, two commodities expected to be impacted throughout Europe and globally as tensions unfold. Ukraine supplies about 13% of global corn exports and 12% of global wheat exports, much of which is imported by China and Middle Eastern countries.

Falling Covid cases across the country are prompting more states to ease mask requirements while others retain existing rules. More liberal restrictions have allowed a growing number of businesses and restaurants to expand operations and revenue.

Central banks worldwide may need to recalibrate monetary tightening policies as persistent inflation and a possible global economic slowdown will be challenging to combat simultaneously. The Federal Reserve is expected to start raising rates this month as it keeps its pledge to stem inflation.

Rising gasoline prices nationally may be hindering consumer confidence, as a larger percentage of incomes is spent at the pump rather than on other items. Excessive fuel price increases can also stifle economic growth since the U.S. economy is still very dependent on oil and gasoline.

As one of the leading producers of energy worldwide, Russia exports essential energy products to Europe and Asia. Roughly 60% of Russia’s exports go to Europe while another 20% end up in China, Russia’s two largest energy trading partners.

Various commodities are rising in price as the invasion of Ukraine has delayed and halted exports of wheat, corn, oil, rare earth metals and natural gas. Global commodity markets are seeing prices rise to levels not reached since 2008, inflicting inflationary pressures on countries and industries worldwide. (Sources: IEA, BEA, Fed, Eurostat, Bloomberg)

Fed Prepares To Raise Rates Starting This Month – Fixed Income Overview

Tensions surrounding the Ukrainian crisis may create additional inflationary pressures simultaneously as economic growth recedes, thus complicating efforts by the Fed to stay the course on its rising rate objectives.

Bond analysts are carefully following the onset of an inverted yield curve, meaning when short-term rates are higher than long-term rates. Short-term yields this past month rose in anticipation of a Fed hike in March, yet with longer term bond yields having little if any increase. Such dynamics have “flattened out” the yield curve where yields are very similar for short-term and long-term bonds. Economists view an inversion as a predecessor to a possible economic slowdown or recessionary environment. (Sources: U.S. Treasury, Bloomberg)

Global Equities Retract As Invasion Evolves – Global Equity Update

Global equity markets reacted to the Ukrainian crisis broadly, with a range of equity sectors experiencing pullback and volatility. Developed and emerging equity markets fell in February as uncertainty grew surrounding the invasion. Of the eleven S&P 500 Index sectors, energy is the only sector posting gains for the year, with technology, real estate, and consumer discretionary stocks posting the largest pullbacks.

European equities are experiencing the brunt of the invasion, as essential energy and food supplies have disrupted numerous industries. European consumers are seeing rapidly rising inflation, curtailing their expenditures.

Rising commodity prices are presenting a challenge for companies as raw material costs soar and supply constraint issues remain intact. Analysts expect that earnings may eventually be affected for certain companies in commodity sensitive industries. (Sources: S&P, Bloomberg, Eurostat)

How Rising Oil Prices Can Stifle Global Growth – Oil Sector Update

Even as the United States has curbed its appetite for oil and gasoline over the past few years, demand among emerging economies has increased. Fossil fuels, including natural gas, petroleum, crude oil, and gasoline still account for roughly 80% of energy consumption worldwide according to the International Energy Agency.

Since oil is a primary energy source, rising oil prices can quickly translate into higher prices in different parts of the economy. Inflation, as measured by the Consumer Price Index (CPI), is made up of various components, including energy, food, and transportation. These three components represent about 20% of the CPI, all of which are directly affected by oil prices. As a larger portion of consumers’ budgets is spent on these three, the less disposable funds consumers will have to spend on other items.

Crude oil is priced in two primary markets, international Brent and as
domestic West Texas Intermediate (WTI). Both are priced per barrel and
determined by multiple factors, including production, supply, demand,
economic growth, weather, and geopolitical issues. Unfortunately, Brent and WTI prices had already been rising due to supply constraint issues and increasing demand. The emergence of the Ukrainian conflict has propelled prices even higher, eclipsing $100 per barrel for Brent in February, a level not reached since 2014. (Sources: IEA, Federal Reserve, Dept. of Energy, S&P)

Total Public Debt Reaches $30 Trillion – Fiscal Policy Overview

The issuance of debt by the U.S. government since the beginning of the pandemic in March 2020 resulted in another $7 trillion being added to total debt outstanding. As of the end of February, total debt outstanding amounted to over $30 trillion, triple to where it was during the financial crisis of 2008.

Economists view the nation’s debt as a burden on fiscal policy, as debt payments can hinder public spending in other more productive areas. Rising interest rates are also a concern as the cost to borrow increases for the government.

Public debt includes all debt issued by the Federal Government in the form of U.S.Treasury bills, notes and bonds. As shorter term bills and notes come due, they are usually paid for by the issuance of new debt. The Fed’s pending rate hikes this month will increase borrowing costs for the U.S. immediately as short-term debt comes due and is reissued. (Sources: U.S. Treasury, Federal Reserve)

Top Oil Producing & Oil Exporting Countries – Global Oil Market

Global geopolitical events have historically affected oil and gasoline prices worldwide as production and supply issues evolve. As the largest oil producer in the world, the Unites States accounts for roughly 20% of total world production. Saudi Arabia accounts for 12% and Russia accounts for 11% of total world production. Even though Russia only produces 11% of total production, it accounts for over 10% of total world oil exports, making it one of the largest exporters of oil.

With oil production at nearly 19 million barrels per day, the United States produces nearly double what Saudi Arabia and Russia produce each day. Countries producing much less, demand larger imports of oil in order to satisfy consumption, such as China.

Over the past twenty years, the U.S. has become nearly non-reliant on foreign oil, essentially producing what it consumes. Some analysts believe that the U.S. may be more immune from the Russian conflict than other countries, whose reliance on Russian oil exports is critical. The United States does import oil from Russia as well as other countries in order to meet the country’s average daily consumption of roughly 20 million barrels. Imports from Russia have averaged about 22 million barrels per month, about the same amount the U.S. produces in a single day. (Sources: IEA, DOE)

Important Age Limits When Parents Send Kids Off To School – College Expense Planning

Auto Insurance

Kids can stay on their parents’ auto insurance even if they have moved out and they’re away at school and still listing the parent’s home address as their primary residence. In addition, children not enrolled in school, considered an eligible dependent (insurers have different definitions), still drive a vehicle owned and insured by a parent, are eligible to stay on their parent’s insurance.

If an adult child has a driver’s license and is living in at home, then normally your auto insurance company may require that she or he is listed on your policy, regardless of their age.

People living in the same household have access to the insured vehicles, so insurance providers want all licensed household members placed on your car insurance policy. This allows your auto insurance company to look at all drivers’ risk factors and calculate car insurance rates accurately.

Health Insurance

Per federal law, a child can remain on their parents’ health insurance until their 26th birthday in most states. There are no restrictions before then, so the child is eligible for coverage under their parent’s plan even if married, and/or not in school.

Claim As Dependent For Taxes

The Federal Government allows you to claim dependent children until they are 19. This age limit is extended to 24 if they attend college. If your child is over 24 but not earning much income, they can be claimed as a qualifying relative if they meet the income limits and/or if they are permanently disabled. In order to be claimed as a dependent, a child cannot have a gross income of more than $4,300 in tax year 2021 or 2022. (Source: IRS)

Why Inflation Figures Can Be Rear View Mirror Data – Statistical Review

Government data figures come in two categories, lagging and leading indicators. Economists interpret lagging data as something that has already passed, as though it’s in the “rear view mirror”. A leading economic indicator is considered forward looking, sort of the view through the front windshield. Leading indicators include Gross Domestic Product (GDP), Consumer Confidence, and the Purchasing Managers Index, which tend to be a prelude to other economic activities. Inflation, as measured by the Consumer Price Index (CPI) is known as a lagging indicator because it measures price changes that occurred in the past. When the CPI numbers are released each month, that data is already 45 days old on average. Food and energy are the two largest components of the CPI, which tend to be extremely volatile.

Inflation can be driven by various factors, such as economic expansion, wages, consumer consumption, and commodities. Rising wages allow consumers to spend more on products and services, producing greater demand for raw materials also known as commodities. There are instances when geopolitical events tend to drive commodity prices higher even if wages are not rising. Many economists currently believe that energy and food prices will remain elevated for an extended period relative to other goods and services. (Sources: Bureau of Labor Statistics)

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