Equities finished the week mostly higher in North America after intraday volatility spiked with the much-anticipated Russian invasion of Ukraine. The Russian-dominated eastern region of Ukraine was expected to be the focus of the attack, but on Thursday, as Russian forces invaded other regions, markets became rattled temporarily. The Dow Jones closed the holiday-shortened week flat, losing six basis points, the S&P gained 0.82%, and the Nasdaq, which on Thursday experienced the largest one-day move since the announcement of the coronavirus in 2020, fluctuated over 6% and finished the week gaining 1.08%. The TSX held firm, advancing 0.50% with the price of commodities pushing higher, led by oil rising 1.92%. European bourses were not able to maintain and lost ground as fears of inflation and an economic slowdown dominated investor sentiment. In addition, Europe’s reliance on Russia for natural gas for heating played on the minds of investors and the public at large. The Europe 600 Index lost 1.58% on the week. Germany’s DAX declined 3.16%, the French CAC 40 fell 2.56%, Italy’s MIB index dropped 2.77%, and the UK’s FTSE 100 lost 0.32%.
Geopolitical events overshadowed the economic data of the week. On Tuesday, the S&P CoreLogic Case-Shiller Indices reported US home prices gained 18.8% year-over-year, the largest increase in 34 years of data. Phoenix dominated the gains jumping 32.5% year-over-year, followed by Tampa rising 29.4% and Miami 27.3%.1 Rising rates are expected to slow the gain in the future as affordability could price many potential buyers out of the market come the spring buying season. Last Tuesday, HIS Markit released its flash US Composite PMI, jumping to 56.0 from January’s reading of 51.1. The US Services Business Activity Index rose to 56.7 compared to January’s 51.2, and the Manufacturing PMI gained 2.0 over January to 57.5. The jump in growth in both the service and manufacturing sectors was attributed to the lower readings in January caused by restrictions imposed to control the spread of omicron. Manufacturing gained momentum as supply bottlenecks eased; however, prices saw record prices for goods and services. New business, workers returning from sick leave, increasing travel, and availability of materials stimulated growth. 2 Also, on Tuesday, the survey of consumer confidence fell in February to 110.5 from 111.1, indicating that consumers are concerned about the direction of the economy. Inflation tops the list of concerns, while at the same time, consumers tend to remain confident in short-term growth. 3
On Thursday, the jobless claims fell 17,000 to 232,000, and continuing claims for all programs decreased 30,906 from the previous week to 2,032,667.4 New home sales decreased 4.5% (on an annualized basis) in January caused by weather and the spread of omicron in the month. Once more, affordability due to rising mortgage rates is mentioned as having a possible impact on the future trend.5 On Friday, the Bureau of Economic Analysis released its latest estimates, reporting a 0.1% increase in personal income, a 0.1% decrease in disposable personal income (DPI), and an increase of 2.1% in personal consumption expenditures (PCE). After inflation, the readings for DPI decreased 0.5%, PCE increased by 1.5%, and the PCE price index rose 0.6%, while the PCE price index excluding food and energy increased 0.5%.6 The PCE price index is the Federal Reserve’s favorite inflation calculator and continues to be running “hot,” leading to speculation that policymakers may consider a more significant rate hike than the 25 basis point increase expected in March. The Fed Governor Christopher Walker said as much on Thursday before Friday’s data release. 7
Over the next several weeks, geopolitical concerns may dominate economic worries of inflation and rising rates. Until there is a resolution of the geopolitical tensions, increased volatility should not be unexpected, particularly in the commodity space.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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