MANHATTAN (CN) — Wall Street clocked in with a fourth-straight losing week, as pressures from Russia’s invasion of Ukraine took precedence over all other data, including two stunningly good jobs reports.
The week’s headlines were replete with bad news out of the Eastern European country, most recently with reports on Thursday that Russia had begun shelling the Zaporizhzhia nuclear power plant, causing dangerous fires that posed a threat of a catastrophic radioactive release, before taking control of it.
So far, the most severe economic impact from the Ukraine conflict has been on oil prices. Barrels of crude were priced at $115 on the West Texas Intermediate exchange on Friday afternoon, the highest they have been in a decade. Experts say the increase in gas prices will drive national retail gasoline prices to nearly $4.50 a gallon in the coming weeks, which would translate to a 19% month-over-month increase in prices this month.
“The upshot is that we now expect [consumer price] inflation to hit a new cyclical high of 8% in March,” Paul Ashworth, chief North American economist at Capital Economics, wrote in an investor’s note. “Unless the crude oil price continues to soar toward $150 a barrel, however, more favorable base effects mean that CPI inflation should begin to drop back markedly from April onwards.”
But equities suffered significantly throughout the week as well. Since last Friday's closing bell, the Dow Jones Industrial Average posted losses of hundreds of points three times, shedding 276 points overall. The S&P 500 and Nasdaq did not fare any better, losing 45 points and 438 points for the week, respectively
Markets failed to capitalize on a fantastic jobs report on Friday showing American companies added 678,000 new jobs in February, well over the consensus forecast of 400,000 jobs. In the report, the U.S. Bureau of Labor Statistics also found the unemployment rate fell to 3.8%, a new low in the pandemic era and equal to the rate in the first quarter of 2019. Average hourly earnings jumping 5.1% over the last year to hit $31.58 for employees in February.
“Today’s strong jobs report is likely to be overshadowed by events in Ukraine, which are causing risk aversion and a flight to safety as the attack on a nuclear power plant illustrates how dangerous the war is to the entire world and not just the tremendous suffering of the Ukrainian people,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance.
Investors already had largely ignored another positive jobs report Thursday from payroll company ADP, which showed a gain of 475,000 jobs in the private sector last month. Nearly all of the gains were among companies that have more than 500 employees, with small businesses employing fewer than 50 employees actually shedding nearly 100,000 jobs in February as the effects of the omicron variant of Covid-19 continued to ripple through the economy.
According to ADP, the spread of job gains among industries was fairly diverse, but leisure and hospitality led the pack at 170,000 jobs gained in February. The job gains are slightly higher than those from February 2021, and a smidge lower than the 509,000 jobs gained in January 2022.
The payroll company additionally revised its January report upward by more than 200,000 jobs. And the Bureau of Labor Statistics revised its two previous jobs report upward by 92,000 jobs.
The two jobs reports — on top of the Labor Department’s unemployment report on Thursday showing another weekly decrease of initial unemployment claims, at 215,000 claims for the week ending February 26 — show the labor force continuing to strengthen. In turn, that will likely strengthen the monetary hawks at the Federal Reserve who are pushing for a 0.5% interest rate increase.
“We expect robust economic momentum and higher labor force participation will help close the remaining 2.1 million jobs shortfall [during the second half] of 2022,” Oxford Economics analyst Lydia Boussour wrote. “With the economy nearly full employment and the Russia-Ukraine war likely to lead to stronger inflation, we expect the Federal Reserve to initiate liftoff with a cautious 25 [basis point] rate hike at its March meeting and raise rates by a total of 175 [basis points] this year.”
The Federal Open Markets Committee meets again on March 15, during which it will almost certainly raise the federal funds interest rate. By how much, though, is up for debate.
Fed Chair Jerome Powell hinted to Congress that he favors a 0.25% increase, saying the central bank will proceed cautiously in the wake of high inflation and the war in Ukraine. Other members of the Fed meanwhile have been calling for stiffer hikes and a more aggressive timetable to sell off the $9 trillion in bonds on its balance sheet.
“To the extent that the 10-year Treasury stays stubbornly low, both for legitimate short-term reasons, due to the escalating war in Ukraine and for less-certain reasons regarding inflation, the Fed has the opportunity to start selling their bonds into that surprising strength,” Zaccarelli said. “With $9 trillion in bonds on their balance sheet, they should reduce that as quickly as the market will let them.”
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