By: Jeff Anderson, CFA
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||2.154 %||15.2%|
Source: Wall St. Journal
Rate Hikes are Here:
The Federal Reserve raised its overnight rate by 0.25%. Chairman Powell signaled rate hikes would happen at every meeting this year. The Fed’s “Dot Plot” now sits at 2% for the end of 2022. That’s quite an uphill climb from where we are now. Inflation is “numero-uno” in terms of the Fed’s biggest concern. The economy is strong enough to handle higher rates, according to Mr. Powell. Economists are projecting inflation to top out around 9% before going lower. Despite the sobering news on inflation and interest rates, the markets shrugged it off, along with the heightened risks in Ukraine. The markets don’t like surprises and currently, everything is definable. There are surely more surprises around the corner but for now, the attitude is, “OK, things aren’t great, but at least we know what we’re facing.”
Despite the kick-off in rate hikes, the markets responded strongly, with the Nasdaq leading the charge, up 8.2% for the week, despite the 2020.
How to Manage the Biggest Risk of All: Uncertainty:
Bloomberg columnist, Allison Schrager put out a good piece on explaining the difference between risk and uncertainty.
We are living with much less risk historically speaking. Ms. Schrager goes on to explain the difference between the two. “Risk can be managed with insurance or hedging; Uncertainty demands flexibility.”
“Our first instinct, when faced with more uncertainty, is to avoid making decisions, bulk up on cash, don’t relocate, wait on retirement, and avoid new debt. But the heightened uncertainty may last a long time and you can’t just keep life on hold.”
I couldn’t have said it any better.
Russia’s Share of Commodity Production:
Commodities have been on a tear since the Russian invasion of Ukraine. Morgan Stanley Research put out a chart of Russia’s share of the major commodities. Palladium is used in catalytic converters for automobiles. Russia’s share is almost 40%. Wheat, oats, rye and barley, oil and gas are also major exports of Russia. The S&P Commodities Index is up nearly 29% year-to-date but had peaked at 46.5% last week. This is one of the reasons why inflation could touch 9%.
Inflation Now vs the 1970s:
Food and Energy costs currently take up 10% of consumers’ budgets, half as much as they did back in the ‘70s says Steven Blitz, chief U.S. economist at TS Lombard. That’s the good news, now the bad news. Mr. Blitz goes on to state that the “long peace from 1989 to 2019” is over. Globalization is reversing as the US on-shores more production, the global supply chain that puts downward pressure on prices will reverse. It doesn’t mean stagflation necessarily, but it “raises the risk of credit sensitivity in the economy.