The Lookout | Week of March 14, 2022

The Lookout | Week of March 14, 2022

With the Fed widely expected to announce a rate hike on Wednesday, the Russia/Ukraine war continuing, and oil prices spiking, our network of investment professionals share what they’re watching this week and where opportunities could arise. Read more below in this week’s edition of The Lookout.

Major Market Events:

Tuesday, March 15: US PPI Data Release

Wednesday, March 16: US FOMC Statement and Fed Interest Rate Decision, US Crude Oil Inventories

Thursday, March 17:  Bank of England Interest Rate Decision, US Initial Jobless Claims, Bank of Japan Monetary Policy Statement

Friday, March 18: Bank of Japan Press Conference

Hunter Frey, Analyst at Catalyst Funds, Rational Funds, and Strategy Shares:

• The past few weeks have changed the trajectory of the domestic and global economic landscape. The Russia-Ukraine war rages on with global geopolitical strife continuing. Higher commodity prices continue to put inflationary pressure on consumers. As we discussed in Case Study: Capitalizing on Stagflation, stagflation was already a risk-on trade; however, stagflation economics have really started to metastasize with a mirror image resemblance of the 1970s. Thus, the Fed’s interest rate decision this week remains a key foresight to the macro economy and slowing GDP growth. Consumption (67% of GDP) remains handcuffed as disposable income is squeezed and inventories remain costly to finance, reducing positive GDP contributions.
• Though the Fed’s decision to increase interest rates is almost a definite, the focus remains on the guidance regarding the velocity of their monetary tightening. The current bear steepening of the yield curve (long-term rates increase faster than short term rates) illustrates the inflationary pressures we have experienced throughout 2021 and into 2022. Thus, potentially hamstrung from the Russia-Ukraine war, the Fed’s hawkish or dovish tightening approach remains highly anticipated.
• In short, uncorrelated asset classes such as non-agency RMBS, interest rate conscious asset classes such as short-term bonds and floating rate bonds, and actively managed futures with exposure to structurally opportunistic commodities can help weather the current market uncertainty.

Matt Ferratusco of Lyons Wealth Management, portfolio manager of a tactical allocation strategy

• Outside of the real-time news emanating from Ukraine, all eyes are on the Federal Reserve meeting this week. Expectations are for a 25 bp interest rate hike, the first in several years. Of more interest to markets is the dot plot and additional color on balance sheet runoff. Markets have been vulnerable not just to surprises from the Fed, but even to confirmation of expectations.
• We are particularly interested in commentary around policy tightening in what may morph into a slowing economy. Economic activity has been resilient thus far in the face of rising inflation, but record oil prices will ripple through the economy and no doubt impact consumers. The root of today’s inflationary pressure has less to do with rampant economic growth and more to do with persistent supply chain bottlenecks resulting from coronavirus policy response, a dynamic which monetary policy has limited ability to solve.

Simon Lack, SL Advisors, and Portfolio Manager of an energy infrastructure fund

• As commodity prices continue to reflect tight markets, recession odds and inflation are both likely to increase.
• Administration policy has been to discourage new supply of traditional energy, which was already pushing prices higher before Putin provided another shove. If Russia’s isolation from global trade continues for many months, which seems likely, this will dominate the narrative around energy inflation.
• Eurodollar futures suggest a cycle peak late next year. The impact of Russia’s invasion has been to shift the neutral rate higher and increase the odds of an overshoot.

Daniel Rudnitsky, SMH Capital Advisor, Portfolio Manager of two income strategies that you can learn about here and here

• The Federal Reserve meets March 15-16 with markets pricing in that a 25-point rate hike will be announced. How the Fed appears to be position on the timing of more rate hikes will be closely followed.
• Key economic reports include a producer price report that could show a double-digit gain from a year ago and the update on retail sales for February. Individual companies continue to release earnings where we will watch for individual positives and negatives as well as trends we see from those earnings.

Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.