Summary
The possibility of Russia/Ukraine peace talks capture the market’s attention.
Russia/Ukraine peace talks got stocks excited upward and commodities excited downward…or maybe the market just needed anything to get excited about. We’ve been discussing the peace talks for weeks, especially when Israel showed its hand and really started moving them ahead. Turkey, which can provide security guarantees to Ukraine, joined in. Those were big developments, which were completely ignored. Yesterday, comments from Russia about diluting military actions around Kiev and Mariupol finally got the market’s attention. Adding to peace momentum were internal U.S. reactions to President Biden’s verbal slip-ups, particularly seemingly calling for regime change in Russia, which seem to us to be tilting the U.S. tone in the direction of de-escalation, too. The Pentagon, in particular, seems to have awakened to the risks coming from the U.S. stance, and even some U.S. media, like the WSJ, are toning things down. Today, though, Russia said there was no breakthrough and the U.S. State Department said the negotiations could be a Russian ruse. We are skeptical over a peace agreement because too many actors could derail it – it requires security guarantees for Ukraine and for Russia from other parties. But, there’s been clear progress, so stay tuned.
Is Covid back as a market driver? Maybe not. Another possible shock the market is looking at is the move back up in Covid cases in Europe. Unlike previous waves in which mobility declined, though, the reduced mobility isn’t happening this time. High vaccination rates combined with fatigue/doubts over lockdown reactions seem to have changed the economic and market impact of this Covid wave. A better jobs outlook, the removal of Covid as a growth headwind and now maybe peace breaking out (however skeptical we are right now) are really keeping the U.S. Federal Reserve (Fed) on the inflation warpath, and should keep front-end rates pushing higher.
U.S. job growth Inflation remains robust, maintaining upward pressure on U.S. front-end yields. The ADP National Employment Report showed nonfarm private sector employment grew by 455,000 in March, slightly down from the 486,000 in February. We think the market will start to laser-focus on employment this year, so this broad-based growth in employment is important. Why? Well, 2022 is looking like the year in which markets digest several new growth headwinds, such as rising commodity prices, a possible profits recession, accelerating de-globalization, geopolitical uncertainty…and rising interest rates. With U.S. yield curves flatter and inverted (3s/10s and 5s/10s), employment will be the key reference point for the Fed; employment is the only thing that get them off their inflation focus. This report, in other words, puts all of those growth headwinds to the side, and keeps the Fed on their hawkish, anti-inflationary path. Good news for labor is increasingly bad news for interest rates.
Originally published by VanEck on March 30, 2022.
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