Oil prices trim early losses as Iran supply fears overshadow Russia measures
The Iran conflict has dominated the headlines, with the financial media primarily focusing on rising oil prices. While higher oil prices can certainly impact the economy, the dollar’s surge, which we hear little of, is an equally consequential market and economic development. Moreover, the appreciating dollar’s ripple effects are being felt across asset classes in ways that are easy to miss but unwise to ignore.
A stronger dollar creates a headwind for US multinational corporations, whose overseas revenues are worth less when translated back into dollars. With roughly 40% of S&P 500 revenues generated outside the US, a sustained dollar appreciation will weigh on earnings. At the same time, dollar strength broadly suppresses commodity prices, which partially offsets the inflationary impulse from higher oil prices. This helps explain why gold and silver have struggled despite the favorable geopolitical backdrop for precious metals.
The most underappreciated impact, however, is on developed and emerging markets. Prior to the Iranian conflict, those two sectors had been among the best performers. Moreover, their recent outperformance was closely linked to the dollar’s weakness. US investors buying foreign assets must convert their dollars into the foreign currency before investing. Thus, a stronger dollar works against their investment. Further, foreign companies that borrow in dollars will see their debt servicing costs rise when the dollar strengthens, regardless of any change in their local interest rates. This tightens global financial conditions and reduces capital flows into risk assets. Moreover, it can trigger currency crises in the most vulnerable economies.
What To Watch Today
Earnings
Economy
The Week Ahead, Jobs, And Retail Sales
The market’s focus this week will be on inflation. CPI on Wednesday is expected to show a 0.2% increase, down 0.1% from last month’s figure. The January PCE price report will be released on Friday. It too is expected to show a 0.2% increase. Changes in energy prices lag in the inflation reports by 2-3 months, so there will be no impact on this week’s inflation data from the recent surge in oil prices.
After a surprisingly strong BLS labor report last month, the February data is quite the opposite. Payrolls fell by 92k jobs, bringing the two-month average to a net gain of a mere 17k jobs per month. The culprit, as we share below, is a loss of jobs in the strongest sectors: Education and Health Care. Over the previous six months, the two sectors added 57k jobs per month on average. See the Tweet of the Day below for more worrisome jobs data. Adding to the dour economic data, Retail Sales fell by 0.2% versus being flat last month. Such a decline was expected.
Tweet of the Day
