‘Don’t fight the tape, don’t fight the Fed’ — Martin Zweig

1. U.S. Adds Sanctions on Moscow After Concluding Russia Invaded Ukraine — U.S. President Joe Biden unveiled sanctions targeting Russia’s sale of sovereign debt abroad and the country’s elites, responding to what he described as the start of Vladimir Putin’s invasion of neighboring Ukraine. The sanctions come after Russia’s President Putin recognized two self-proclaimed separatist republics in eastern Ukraine as independent, a dramatic escalation in his standoff with Ukraine and its supporters in the West. Putin has denied Russia intends to invade Ukraine. the penalties targeted state-owned banks VEB.RF and Promsvyazbank, which the U.S. said hold more than $80 billion in assets and finance the Russian defense sector and economic development.
The U.S. measures will freeze the banks’ U.S. assets, ban Americans from doing business with them, cut them off from the global financial system and eliminate their access to the dollar. Meanwhile, The S&P 500 declined 44.11 points to 4304.76, leaving the index down more than 10% from its Jan. 3 high and marking its first correction since the onset of the Covid-19 pandemic in February 2020.
2. Ukraine Crisis Kicks Off New Superpower Struggle Among U.S., Russia and China — the challenges are different than those the U.S. and its network of alliances faced in the Cold War. Russia and China have built a thriving partnership based in part on a shared interest in diminishing U.S. power. Unlike the Sino-Soviet bloc of the 1950s, Russia is a critical gas supplier to Europe, while China isn’t an impoverished, war-ravaged partner but the world’s manufacturing powerhouse with an expanding military. This emerging order leaves the U.S. contending with two adversaries at once in geographically disparate parts of the world where America has close partners and deep economic and political interests. The Biden administration now faces big decisions on whether to regear its priorities, step up military spending, demand allies contribute more, station additional forces abroad and develop more diverse energy sources to reduce Europe’s dependence on Moscow.
3. Fast-Spreading Covid-19 Omicron Type Revives Questions About Opening Up — A more infectious type of the Omicron variant has surged to account for more than a third of global Covid-19 cases sequenced recently, adding to the debate about whether countries are ready for full reopening. Health authorities are examining whether the subvariant of Omicron, known as BA.2, could extend the length of Covid-19 waves that have peaked recently in Europe, Japan and some other places. Other countries have had more trouble shrugging off Omicron. In Denmark, where an estimated 92% of cases were BA.2 as of mid-February, a peak at the end of January was followed by another two weeks later.
Evidence so far suggests BA.2 is some 30% more infectious than its cousin, the BA.1 subvariant that kicked off the Omicron wave in southern Africa in November 2021. In South Africa, BA.2 has accounted for 82% of cases so far in February, according to health authorities in that country.
4. U.S. Sanctions Against VTB and Sberbank Aim to Disrupt Russia’s Economy — the U.S. on cut Russia’s two largest banks from direct access to the U.S. dollar, curtailing their activities and posing a threat to Russia’s exporting economy. State-controlled Sberbank and VTB together hold roughly half of all of the banking system’s assets, and are big lenders and service providers to companies in the country. One in every two companies in Russia has an account at Sberbank, the country’s largest bank says.
The moves, coordinated with allies in the U.K. and European Union in response to the invasion of Ukraine, however, fall short of a total shutdown. In effect, the actions will be more like sand in the gears of the Russian financial machine.
5. U.S. Consumer Spending Rose 2.1% in January and Inflation Accelerated Amid Omicron Wave — spending rose a seasonally adjusted 2.1% in January from the previous month, rebounding from a revised 0.8% decline in December, the Commerce Department reported Friday. Personal income was unchanged on the month, following the expiration of the federal government’s monthly child tax credit. The department’s measure of inflation—the personal-consumption-expenditures price index—rose to 6.1% in January from a year earlier, the fastest pace in four decades. After adjusting for inflation, consumer spending was up 1.5% in January while household income after taxes was down 0.5%.
6. Fed’s Preferred Inflation Measure Reaches Fastest Pace Since 1983 — the Commerce Department’s personal-consumption-expenditures index measure of core inflation, which excludes volatile food and energy costs, rose 5.2% in January from a year ago, up from 4.9% in December. That marks the sharpest 12-month increase since April 1983. On a monthly basis, the core PCE price index climbed a seasonally adjusted 0.5% in January from the prior month, the same pace as in the previous three months.
The Commerce Department’s measure of overall consumer inflation increased 6.1% from a year earlier, the fastest pace since 1982. The data reflect prices in January, before Ukraine-Russia tensions pushed oil prices to seven-year highs. The most-widely held futures for Brent crude, which call for delivery of oil in May, exceeded $100 a barrel on Thursday after Russia’s invasion of Ukraine threatened to scramble the region’s exports.

The week ahead — Economic data from Econoday.com:

Only when the tide goes out do you discover who’s been swimming naked. — Warren Buffett

1. U.S. Producer-Price Inflation Stays Hot, Reinforcing Fed’s Plan to Start Raising Rates — the producer price index for final demand increased 9.7% from January of last year and 1% from the prior month, latest Labor Department data showed. The gain from December was the largest in eight months. The median forecasts in a Bloomberg survey of economists called for a 9.1% year-over-year increase and a 0.5% monthly advance. The figures, which reflected broad increases across categories, may bolster the case for the Federal Reserve to be more aggressive on raising interest rates and shrinking its bond holdings in the coming months. Transportation bottlenecks, robust demand and labor constraints experienced through 2021 have carried over into this year and risk keeping price pressures well-elevated.
2. U.S. Retail Sales Grew by 3.8% in January — sales at retail stores, online and restaurants rose by seasonally adjusted 3.8% in January from the prior month, the Commerce Department reported. That marked the strongest monthly gain since last March when pandemic-related stimulus was being distributed to households. The jump in retail spending last month also represented a rebound from December, when sales fell by a revised 2.5%.
Increased spending was broad-based, with large gains for purchases of vehicles, furniture and building materials. Online sales also rose sharply. Restaurant and bar receipts dropped last month as consumers limited in-person services during the latest Covid outbreak. Retail spending has been choppy in recent months as consumers face rising inflation and supply-chain disruptions because of the Covid-19 pandemic, despite relatively robust household finances and a strong labor market. Unlike other economic-data reports produced by the U.S. government, retail sales aren’t adjusted for inflation. That means higher retail-sales figures can reflect higher prices rather than more purchases.
3. Mortgage Rates Approaching 4% — the average fixed rate for a 30-year mortgage was 3.92% for the week, the highest since late May 2019, according to Freddie Mac’s Primary Mortgage Market Survey. The rise is in response to inflation and higher-than-expected consumer spending, Freddie Mac chief economist Sam Khater said. The climb has occurred in tandem with the 10-year Treasury yield’s rise. Year to date, the yield has increased roughly 0.8 percentage point, crossing the 2% mark for the first time since 2019 last Thursday.
4. Nasdaq Sinks Into Death Cross After 16% Drop From November Peak — the Nasdaq Composite Index tumbled into an ominous “death cross” technical formation Friday for the first time since April 2020, when the pandemic battered the global economy and U.S. equity markets swooned. Following Friday’s 1.2% decline, the index has now shed 16% since touching a record high on Nov. 19. The pattern, which is used by some investors to assess longer-term trends, has at times presaged further weakness. It appears when an index’s short-term 50-day moving average crosses below its longer-term 200-day moving average. With inflation surging, the Federal Reserve is preparing for its sharpest monetary policy tightening in decades in an attempt to bring down prices. This has sparked wild swings among the rate-sensitive tech, Internet and growth stocks that fill the Nasdaq Composite, since their elevated valuations become targets as borrowing costs rise.

The week ahead — Economic data from Econoday.com:

“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.” ― Howard Marks

1. New York to Lift Mask Mandate for Businesses as Omicron Ebbs — New York Governor Kathy Hochul is lifting a mask mandate for businesses that don’t check Covid-19 vaccination status, citing high inoculation rates and low transmissions across the state. Mask mandates will remain in place in schools, health-care facilities and nursing homes, although Hochul said dropping masks in March is a “strong possibility.”. Local municipalities can continue to determine their own rules, including New York City, which requires vaccination for theaters, restaurants and other businesses. A spokesperson for New York City Mayor Eric Adams said the city will continue these requirements.
2. Disney+ Subscriptions Near 130 Million — Disney+ reported 129.8 million subscribers at the end of the holiday quarter, up from 118.1 million subscribers in the prior quarter. Analysts polled by FactSet expected 124.7 million subscribers to the platform. Sales at its theme parks and consumer products division—which includes Walt Disney World and Disneyland resorts—were $7.23 billion, buoyed by increasing strength in outdoor travel. Analysts expected $6.36 billion. The company said its domestic parks and resorts reported record revenue and operating income.
3. U.S. Households Took On $1 Trillion in New Debt in 2021 — Americans took on more new debt in 2021 than in any year since before the 2008-09 financial crisis.
Total household debt rose by $1.02 trillion last year, boosted by higher balances on home and auto loans, the Federal Reserve Bank of New York reported. It was the largest increase since a $1.06 trillion jump in 2007. Total consumer debt now sits at around $15.6 trillion, compared with $14.6 trillion a year earlier. The increase is largely a function of a sharp rise in prices for homes and cars. The price of the average U.S. home rose close to 20% in 2021, boosting mortgage balances and pricing out many middle-class buyers. Rising prices for new and used cars drove auto-loan originations to a record $734 billion.
4. U.S. Inflation Rate Accelerates to a 40-Year High of 7.5% — The Labor Department reported the consumer-price index—which measures what consumers pay for goods and services—in January reached its highest level since February 1982, when compared with the same month a year ago. That put inflation above December’s 7% annual rate and well above the 1.8% annual rate for inflation in 2019 ahead of the pandemic.
The so-called core price index, which excludes the often volatile categories of food and energy, climbed 6% in January from a year earlier. That was a sharper rise than December’s 5.5% increase and the highest rate in nearly 40 years. High inflation is the dark side of the unusually strong economy that has been powered in part by government stimulus to counter the pandemic’s impact. January’s continued acceleration increased the likelihood that Federal Reserve officials could speed up a series of interest-rate increases this spring to ease surging prices and cool the economy.
5. Turkey’s Sovereign-Debt Rating Cut Further Into Junk by Fitch — Fitch lowered Turkey’s score to B+ from BB-, making it four notches below investment grade and on par with Egypt and Bahrain. The outlook for Turkey is negative, the rating company said. The lira lost as much as half its value against the dollar before the government intervened at the end of December to stem the currency’s decline. Some of the government measures — including a lira deposit plan that protects savers from swift bouts of depreciation — introduced a level of stability to the lira but inflation climbed to 48.7% in January, the fastest pace of increases in two decades.

The week ahead — Economic data from Econoday.com:

“Achieving gains usually has something to do with being right about events that are on the come, whereas losses can be minimized by ascertaining that tangible value is present, the herd’s expectations are moderate and prices are low. My experience tells me the latter can be done with greater consistency. ― Howard Marks

1. Omicron Sub-Variant May Cause New Surge of Infections in Current Wave – a sub-variant of the omicron coronavirus strain, known as BA.2, is spreading rapidly in South Africa and may cause a second surge of infections in the current wave, one of the country’s top scientists said. BA.2 is causing concern as studies show that it appears to be more transmissible than the original omicron strain, the discovery of which was announced by South Africa and Botswana in November.
Research also shows that getting a mild infection with either of the two strains may not give a robust enough immune response to protect against another omicron infection. There’s no indication that the sub-variant causes more severe disease from infection surges seen in Denmark and the U.K.
2. Meta Faces Historic Stock Rout After Facebook Growth Stalled — the catalyst was startling news that for the first time ever, Facebook’s user growth seems to have hit a ceiling and its momentum is stalling. Thursday’s collapse wiped out more than $230 billion of market value in an instant — a figure unprecedented in stock-market history. Zuckerberg acknowledged that Meta is facing serious competition for user time and attention, particularly from viral video-sharing app TikTok. The report marks a dramatic turnaround for a company that has posted share gains in every year but one since its 2012 initial public offering, stoking concern that Meta Platforms’ flagship product and core advertising moneymaker has plateaued after years of consistent gains.
3. U.S. Covid-19 Hospitalizations Continue Tracking Downward — Hospitalizations for Covid-19 in the U.S. continued to fall, with the seven-day average of patients with confirmed or suspected cases easing to 134,000 last Wednesday, down 16% from a Jan. 20 high, according to data from the Department of Health and Human Services. Deaths, a lagging indicator, are ticking upward, reaching a seven-day average of 2,530, according to data from Johns Hopkins University, though they are off the highs recorded in January last year. Public health experts say that while the more contagious Omicron variant of the virus is less likely to cause severe illness than previous variants, the large number of infections this winter means it is continuing to cause a large and growing number of fatalities.

The week ahead — Economic data from Econoday.com:

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” — John Kenneth Galbraith

1. GM Plans Multibillion-Dollar EV Push With Michigan Plants — GM said it would convert a suburban Detroit factory into a center for the production of electric pickup trucks and build a battery-cell plant in Lansing, Mich. It plans to spend $4 billion to convert its Orion Assembly factory to build plug-in trucks and will split the cost of the $2.6 billion battery factory with partner LG Energy Solution. On top of this spending, GM plans to invest about $500 million into two assembly plants near Lansing.
Altogether, GM plans to contribute nearly $6 billion of the $7 billion in the total costs for the projects, a figure that the car company says is its single largest investment in history. The spending is expected to create 4,000 jobs in the state, the auto maker said. Plans for the Orion revamp and the new battery-cell plant were first reported last month by The Wall Street Journal.
2. Federal Reserve Tees Up March Interest-Rate Increase — Fed Chairman Jerome Powell said the central bank’s rate-setting committee was ready to raise rates at its March 15-16 meeting. “The economy no longer needs sustained monetary-policy support,” he said. The central bank approved one final round of asset purchases, which will bring that stimulus program to a conclusion by March. Officials continued deliberations at their two-day meeting over how and when to shrink the Fed’s $9 trillion securities portfolio, which has more than doubled since March 2020. The Fed cut short-term interest rates to near zero and started buying bonds to lower long-term rates in 2020 as the coronavirus pandemic hit the U.S. economy, triggering financial-market volatility and a deep, short recession.
3. Tesla Posts Record Annual Profit — Elon Musk’s electric-vehicle maker posted a $5.5 billion annual profit on $53.8 billion of sales last year, after increasing vehicle deliveries at its fastest pace in years. That is up from $721 million in profit and $31.5 billion in sales in 2020, when Tesla generated its first full-year profit, and ahead of Wall Street’s expectations. Tesla delivered more than 936,000 vehicles globally last year, up 87% from 2020, despite global computer-chip shortages that constrained vehicle production across the auto industry.
4. U.S. Economy Grows as Fourth-Quarter GDP Shows Strongest Year in Decades — Gross domestic product, the broadest measure of goods and services, in the fourth quarter grew to 6.9% annual rate. The gain reflected solid spending by households, much of it occurring early in the quarter, and companies pushed to restock their shelves to overcome persistent supply shortages. Output grew 5.5% in all of 2021, when comparing the fourth quarter to the same period a year earlier. The economy hasn’t grown that fast since 1984, during President Ronald Reagan’s first term, when the country was rebounding from a double-dip recession and an era of high inflation.

The week ahead — Economic data from Econoday.com: