Prices Rose 7.9% in February Over Last Year… Last month, inflation reached the highest level since early 1982, and those numbers do not include the jump in energy prices after Russia invaded Ukraine.
What it means— Prices soared by almost 8% but investors shrugged, because they’re rightly more concerned with the events in Ukraine. The latest inflation numbers show that gasoline prices rose 6.6% before Russia invaded, driving up prices by 38% over last year. Those increases added 1.4% to the headline annual inflation total.
But that wasn’t the only thing driving up prices. Further down, the report shows that shelter prices rose 0.5% for the month and are up 4.7% over last year. Those numbers don’t sound too bad compared with energy prices, but consumers spend 32% of their budget on shelter, whereas they spend just 3.72% of their budget on gas. Shelter added 1.54% to the annual inflation figure. Expect this double shot of price pain to continue next month when the effects of the war make it into the equation and rents continue to climb.
Oil Tops $130 per Barrel, Average Gasoline Price Reaches $4.35 per Gallon… Oil prices rallied as President Biden declared Russian imports off-limits. Gasoline prices reached the highest nominal level in history.
What it means— This is a thematic repeat from last week. Western nations are turning the screws on Putin by refusing to buy Russian oil, but they don’t have enough alternative supply to make up the lost barrels. The supply and demand imbalance shows up as higher prices at the pump.
The price of oil dropped dramatically on Wednesday on rumors of ceasefire talks, then shot higher on Thursday when those talks failed, only to come down again. Expect the volatility, and high prices, to continue for months to come.
Most news stories leave out a small fact about the energy sanctions: they haven’t started yet. While some oil companies are refusing to buy Russian supplies, national sanctions won’t go into effect for months. The high prices we see today are in anticipation of what will happen this summer as countries refuse Russian oil. Buckle up, it’s going to be a rough ride.
Biden Approaches Venezuela for More Oil, Throws Shade at U.S. Producers Over Price Gouging… President Biden sent a delegation to Venezuela to inquire about easing sanctions on the nation to add more oil the world markets. He also called for oil producers to refrain from price gouging during the current crisis.
What it means— This doesn’t sound like a chapter out of “How to Win Friends and Influence People.” The administration is asking for favors from a hostile country that previously nationalized (stole) energy production equipment while dressing down domestic producers. As expected, Venezuelan President Nicolás Maduro is crowing about how the Americans need his help, while the American Petroleum Institute is wondering how its members became the bad guys. Don’t expect much out of either camp.
Venezuela is chock-full of decrepit, broken-down energy equipment seized from Western oil companies when the Venezuelan government nationalized operations decades ago. They can’t dramatically increase production or else they would have done that by now. No one is motivated to help them because the last time around they seized production platforms and all related equipment.
Domestic producers would need to buy or lease equipment and gin up hiring to increase production not knowing how long this will last. Further, the Administration nominates individuals to put the oil industry into bankruptcy. It’s unlikely producers want to risk more capital that may be needed for a legal defense fund.
Ten-Year Treasury Bond Yields Walk Higher, Nearing 2%… After falling near 1.70% on the flight to quality in the first days of the invasion, yields have reversed course.
What it means— Interest rates remain exceptionally low, and the Federal Open Market Committee (FOMC) will meet Wednesday. The central bankers have made every indication that they will raise short-term interest rates at that meeting and will end their bond-buying program. However, the Fed increased its balance sheet by $6 billion last week. Is this a “soft ending?”
The geopolitical crisis added some inflationary pressure to the U.S. and other economies, but we were dealing with rising prices before this occurred. The Fed’s situation is more complicated due to the invasion. If the war and eventual occupation continues throughout the year, it’s likely the Fed won’t raise rates as high as it probably should. The central bankers must still deal with the Fed’s bloated balance sheet. Quantitative tightening of any size will put downward pressure on the financial markets.
Fewer Than 50 Ships Are Waiting To Unload at the Port of Los Angeles… After numbering more than 100, the queue of ships waiting to dock and unload cargo in Los Angeles has fallen dramatically over the last 45 days.
What it means— Part of this is the cycle of shipping. Manufacturers send most of their stuff to the U.S. in the late summer and early fall, just ahead of the holiday selling season. There’s a natural lull after the New Year and even less shipping during the Chinese New Year. But even with these annual cycles, it looks like the shipping snarls of the past two years might be easing. If so, any drop in shipping costs might give consumers at least a little relief as they shop…or the savings might end up boosting retailer profits.
Is the Russian Convoy Outside Kyiv Stuck Because of Bad Chinese Tires? … The Russian Ministry of Defense reported that the military convoy 30 kilometers outside of Kyiv was stalled due to Ukrainian resistance, mechanical breakdown, and congestion.
Karl Muth, an academic at the University of Chicago, has a different theory. After seeing pictures of the stalled vehicles, he thinks that poor-quality Chinese tires are partly to blame.
Muth noted that the tires look like Chinese Sea YS20s, a cheap imitation of the Michelin XZL military design. Former Pentagon staffer Trent Telenko noted that when you leave military tires in one place for extended periods of time, they become subject to sidewall failure after the vehicle travels a long distance. The combination of poor quality and poor maintenance will make moving the trucks across the muddy northern plains of Ukraine very difficult.
Data supplied by HS Dent Research
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