Stocks Lower in a Volatile Session as Geological Crisis Persists…..

U.S. stocks finished lower in a volatile session, unable to sustain early gains and on the heels of yesterday’s afternoon rally after Fed Chief Jerome Powell offered some clarity on the magnitude of the initial rate hike, saying he would propose a 25 basis-point increase at the next meeting in two weeks. The markets continued to be cautious amid heightened geopolitical uncertainty and its impact on the global economy, as energy and commodity prices have spiked and could have an amplifying effect on already sizzling inflation. Fed Chairman Powell concluded his two-day Congressional testimony noting the possibility of upward pressure on inflation, at least for a while, due to rising commodity prices and highlighted the importance of being careful while conducting policy in this uncertain environment. The economic calendar was robust today, with initial jobless claims moderating more than expected, February service sector growth disappointing, Q4 productivity remaining solid, though unit labor costs were adjusted higher, and factory orders rising much more than expected. Treasuries were mixed, after some wild swings as of late, the U.S. dollar was back in rally mode, while WTI crude oil prices were lower after the recent surge, and gold increased. In earnings news, Best Buy posted mixed results and offered a current year forecast that was below expectations, though it provided some upbeat long-term commentary and raised its dividend, and Snowflake’s revenue growth forecast put pressure on company’s shares. Europe finished broadly lower following a host of service sector reports and amid the continued skittishness regarding the implications of the Russia/Ukraine crisis, while Asia finished mixed.

The Dow Jones Industrial Average fell 97 points (0.3%) to 33,795, the S&P 500 Index decreased 23 points (0.5%) to 4,363, and the Nasdaq Composite declined 214 points (1.6%) to 13,538. In moderate volume, 5.0 billion shares of NYSE-listed stocks were traded, and 5.0 billion shares changed hands on the Nasdaq. WTI crude declined $2.93 to $107.67 per barrel. Elsewhere, the gold spot price advanced $17.50 to $1,939.80 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was up 0.4% at 97.75.

The wild swings in the markets have come courtesy of the intensified invasion of Ukraine by Russia that triggered a swift response from the U.S., European Union, and other key global allies in the form of unprecedented sanctions. Several Russian financial institutions were restricted from using the SWIFT global payment system, while foreign currency reserves and assets of Russia’s central bank were frozen, making it extremely difficult to run its economy. The wide swath of sanctions has so far avoided Russia’s exports of energy and agriculture, of which it and Ukraine have a strong global presence. This has put heavy upside pressure on already sizzling inflation, and self-imposed sanctions on Russia’s oil by a host of global refiners is exacerbating the situation. Meanwhile, an agreement by the U.S. and its allies to release 60 million barrels of oil from strategic reserves did little to help the supply issues, while OPEC and its allies, known as OPEC+ held off on ramping up production. Russia and Ukraine met for a second time for discussions on a potential ceasefire but only agreed on organizing humanitarian passage for civilians that could involve a temporary ceasefire for evacuations.

Initial jobless claims came in at a level of 215,000 for the week ended February 26, versus the Bloomberg estimate calling for 225,000, and down from the prior week’s upwardly-revised 233,000 level. The four-week moving average declined by 6,000 to 230,500, and continuing claims for the week ended February 19 nudged higher by 2,000 to 1,476,000, versus of estimates of 1,420,000. The four-week moving average of continuing claims dropped by 36,250 to 1,539,500.

Final Q4nonfarm productivity was unrevised at a 6.6% increase on an annualized quarter-over-quarter (q/q) basis, and versus estimates of an adjustment to a 6.7% gain. Q3 productivity was positively-adjusted at a 3.9% decline, from the initially-reported 5.0% drop. Labor productivity, or output per hour, is calculated by dividing real output by hours worked and is a major contributor to the economy’s long-term health and prosperity. Unit labor costs were adjusted to a 0.9% q/q increase, from the preliminary rise of 0.3%, versus forecasts of no change to the preliminary reading. Unit labor costs were revised upward in Q3 to an increase of 10.6%, from the initial estimate of a 9.3% rise.

The February Institute for Supply Management (ISM) Services Index showed expansion in the key services sector (a reading above 50) unexpectedly slid. The index declined to 56.5, from the 59.9 in January, and versus estimates of an increase to 61.1. Growth in new orders and business activity both declined month-over-month (m/m), and employment dropped back into contraction territory. Meanwhile, new export orders jumped, inventories rose, and prices paid ticked further above the 80 mark. The ISM said, “Respondents continue to be impacted by supply chain disruptions, capacity constraints, inflation, logistical challenges and labor shortages. These conditions have affected the ability of panelists’ businesses to meet demand, leading to a cooling in business activity and economic growth.”

The final February Markit U.S. Services PMI Index was unexpectedly revised lower to 56.5 from the preliminary 56.7 level, where it was forecasted to remain, but well above January’s reading of 51.2. A reading above 50 denotes expansion.

Factory orders rose 1.4% m/m in January, topping estimates of a 0.7% gain, with the prior month’s 0.4% decline being revised to a 0.7% increase. Durable goods orders—preliminarily reported last week—were unrevised at a 0.6% rise for January, and excluding transportation, orders were unadjusted at a 0.7% advance. Finally, nondefense capital goods orders excluding aircraft—considered a proxy for capital spending—were positively-revised to a 1.0% gain.

Amid the uncertainty regarding how the Ukraine conflict could impact the Fed’s plans, Chairman Jerome Powell concluded his two-day Congressional semi-annual testimony before the Senate Banking Committee. The Chairman noted that energy and commodity prices could add upward pressure to inflation, and he also noted that it’s important to be careful while conducting policy in order to not exacerbate the current uncertainty. Powell did not deviate from his message to the House yesterday, where he noted a strong economy, an “extremely tight” labor market, and inflation that is now running well above its longer-run objective of 2.0%. He added that due to longer-lasting supply disruptions, exacerbated by waves of the virus, and price increases that are now spreading to a broader range of goods and services, it expects it will be appropriate to raise the target range for the fed funds rate at its next meeting later this month. The Fed Chief also said he will support a 25 basis point (bp) rate hike at that meeting, noting that the Central Bank will proceed carefully given the unfolding geopolitical events in Ukraine. He also pointed out that if inflation stays hot, the Fed could hike rates at a future meeting by 50 bps. The markets reacted positively yesterday to his comments as they provided some clarity on how the Fed may commence its rate hike campaign.

Treasuries were mixed with the curve flattening, after a wild ride recently that saw a sharp rally apply heavy downside pressure on yields amid a flight to safety due to the Russian invasion, while falling sharply to boost yields following Fed Chief Powell’s comments. The yield on the 2-year note rose 2 bps to 1.53%, the yield on the 10-year note was little changed at 1.85%, and the 30-year bond rate ticked 1 bp higher to 2.24%.

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