Wednesday Market Roundup: Hike in Inflation Expected post-Covid; NY Futures Rebound Despite US Sanctions Against Russia

by Market Updates and Alerts |

Companies prepare for longer inflation after covid in the US

As US businesses and consumers grapple with the highest inflation in four decades, some companies are already betting these cost increases will last longer than many economists are predicting.

At farm equipment parts maker HCC, President Brian Nelson is counting on two to three years of higher costs. The Mendota, Illinois-based company, which is a supplier to industries such as Deere, is anticipating a double-digit percentage increase in its payroll this year.

It’s still new territory for companies, including HCC, which for decades operated in a US economy where inflation rates rarely exceeded the Federal Reserve’s 2% target. But with prices rising by more than double that mark, and with no sign of having peaked, momentum is starting to change behavior.

Inflationary Cycle

“Inflation is inertial,” according to Diane Swonk, chief economist at consultancy Grant Thornton. “We had long periods of low inflation because it generates low inflation. And higher inflation begets higher inflation.”

Part of this dynamic can be seen in the price inflation of goods spreading to certain services.

Wages are a key category where increases are having knock-on effects.

And the value is still rising. Hourly pay is now closer to $17.50, and Fledderman worries that the 3% payroll increase forecast for 2022 may already seem too low.

There is a real possibility that unless the US enters a recession, undermining inflation, gains in consumer prices could be well above the Fed’s 2% comfort zone by 2024, according to Jason Furman, who led the Obama administration’s Council of Economic Advisers and now teaches at Harvard University.

A Fed survey in Atlanta released this month found that business expectations for inflation rose substantially in February, reaching 3.6%. Approximately 40% of the companies surveyed expected significant upward pressure on labor and other costs.

NY Futures Recover Despite US Sanctions Against Russia

US stock futures rose on Wednesday morning along with Asian stocks as investors weighed the scope of sanctions imposed on Russia to gauge the geopolitical risks of the Ukraine standoff.

Shares rose in Australia and South Korea, while Hong Kong contracts fell. On Tuesday, the S&P 500 (SPX) entered a correction, down 10% from its January peak. An indicator that measures the dollar against other global currencies and gold were stable as demand for defensive assets eased a little.

US Treasuries fell and the yield curve flattened amid a commodity rally that highlighted the economic risks of inflation. There is no spot trading of US Treasuries as Japanese markets are closed for a local holiday. The yield on Australia’s three-year bonds hit the highest level in nearly three years.

Fears that the Ukraine stalemate could disrupt commodity supplies boosted commodities such as energy, wheat and nickel. Crude oil reduced some of the recent gains on the possibility of a resumption of Iranian exports if the country reaches a nuclear deal with world powers.

US President Joe Biden has announced measures against the sale of Russia’s sovereign debt abroad and the country’s elites. Although President Vladimir Putin has denied that Russia intends to invade Ukraine, Russia’s upper house has given him the green light to send troops into separatist-controlled regions.

Geopolitical risks are putting further pressure on markets, which were already stressed by the prospect of a tighter monetary policy from the Federal Reserve to fight inflation. Expectations of interest rate hikes by the Fed widened as investors weighed the implications of higher raw material costs in the wake of tension in Ukraine.

Analyzing penalties

Biden said the US is also working with Germany to ensure certification of the NordStream 2 pipeline, which runs from Russia to Germany, does not advance.

Markets appear to view the various sanctions “as modest and perhaps not as aggressive as feared,” Chris Weston, head of research at Pepperstone Financial Pty, wrote in a note. He added that perceptions can still change quickly as events are fluid.

The latest US data showed that Markit’s Industry and Services PMI data beat estimates, suggesting recent growth concerns were driven by the omicron variant. But US consumer confidence is at its lowest level since September.

In China, regulators have asked China Huarong Asset Management Co. and its peers to buy real estate assets from troubled developers and formulate plans to take on or restructure smaller debt, seeking to stabilize the world’s second-largest economy.

Still to come this week:

  • BOE Governor Andrew Bailey speaks to the Treasury Committee on Wednesday;
  • Bank of Korea monetary policy decision, Thursday;
  • EIA Crude Oil Inventories Report, Thursday;
  • Fed officials Loretta Mester and Raphael Bostic speak, Thursday;
  • US: New Home Sales, GDP, Initial Jobless Claims, Thursday
  • US: Consumer Income, Durable Goods, PCE Deflator, University of Michigan Consumer Sentiment, Friday;