Stocks and U.S. equity futures slid on Monday, while havens, including sovereign bonds rose amid fears of an inflation shock in the world economy as oil soared on the prospect of a ban on Russian crude supplies.
S&P 500 contracts fell 1.5%, NASDAQ 100 some 2% and European futures about 3%. Brent oil hit $139 a barrel, and West Texas Intermediate hit $130 a barrel before trimming some of the gains.
Some media reported that the Biden administration is considering prohibiting Russian oil imports into the U.S. without the participation of allies in Europe, at least initially. The administration has yet to decide on a U.S. import ban, with the timing and scope of any move still fluid, according to the people who spoke on condition of anonymity.
On Monday, oil soared to as high as $139 a barrel in Asian trading. It emerged that the Biden administration was weighing a possible embargo of Russian crude, fanning supply fears in an already volatile market. Brent crude oil jumped as much as 18% before paring gains, while U.S. equity futures dropped on the prospect of accelerating inflation.
Complete removal of Russian oil from global supply could mean a far grimmer outcome. Energy prices are spiking, but much of the run-up seen in recent days could recede within a few months resulting in a short-term impact on growth and inflation.
One factor that makes this price shock different from others is how much oil the U.S. produces. With U.S. production and demand in rough balance, money is transferred from consumers to producers inside the economy, rather than from the U.S. to foreigners. That will hit individual American families and certain regions of the country harder but boost the profits of U.S. energy companies.
After Fed Chair Jerome Powell all but assured markets that a 25-bps rate hike is in the cards at this month’s FOMC meeting, the surprisingly hot February jobs report will do little to change that trajectory. Still, such a strong labor market amid high inflation, we expect February CPI inflation to reach 8%, which means the FOMC might have gone for a 50 bps hike in the absence of the Russia-Ukraine war. Beyond March, that might be precisely what the FOMC will do.
The headline nonfarm payroll number, produced by the establishment survey, increased 678k in February, above the consensus of 423k. The monthly employment changes for December and January were revised up by 92k. The labor market is running very hot, and past revisions once again showed that hiring was, in fact, stronger than what real-time data showed at the time.
Growth in average hourly earnings surprised on the downside. They were up 5.1%, substantially below consensus at 5.8%, from a downwardly revised 5.5% the previous month.
The easing of labor shortages might be starting to slow the climb in wages, which could provide a glimmer of support to the optimists on the FOMC that inflation might come down later this year. But the current pace of inflation remains elevated and inconsistent with the Fed’s 2% target and does not dismiss the need for the Fed to push rates close to the neutral level.