Russia’s Ruble, Financial Markets Are Hammered by Sanctions Powerful Western sanctions rocked Russia’s financial system and triggered a spiral in the ruble, drawing the central bank into an emergency doubling of interest rates.

The Russian ruble fell as low as 111 to the U.S. dollar from 83 on Friday, a drop of more than 20% and, if sustained, the biggest single-day fall on record. But trading was spotty, with local onshore markets frozen by the central bank and markets outside Russia reluctant to trade the currency.

The Bank of Russia took a raft of measures early Monday to protect Russia’s banking system. It raised benchmark rates to 20% from 9.5% in an attempt to attract savings into banks, the largest of which were targeted by Western sanctions and will be all but cut off from international markets.

The bank delayed trading on domestic debt and currency markets, making it difficult to assess where the ruble would end up. The central bank blocked the opening of the stock market until at least later in the afternoon Monday. It also ordered Russian companies, some of which generate sales for energy products in dollars, to sell 80% of their foreign-currency revenue. The move will create demand for rubles and prevent companies from hoarding dollars.

The quick unraveling in value of the ruble will impose severe costs on the Russian economy, stoking already-high inflation and likely prompting further aggressive interest-rate increases from the Russian central bank. (…)

The European Union, the U.S., the U.K. and Canada announced a set of coordinated measures, including cutting some Russian banks off the Swift financial messaging system, a key piece of banking infrastructure that facilitates payments of all kinds in the economy.

They also announced a stinging set of sanctions on Russia’s central bank, seeking to neutralize the country’s $600 billion of foreign-currency reserves and sap Moscow’s ability to shore up the ruble and protect the economy from the wider disruptions of war.

Trade in the Russian ruble essentially seized. Buyers were unwilling to take the risk of holding the Russian currency amid fears that the Bank of Russia will be unable to use its reserves to support the ruble in the foreign-exchange market because of the sanctions, traders said. (…)

In Russia over the weekend, long lines formed at ATMs as consumers looked to stock up on cash. A domestic run on savings could imperil the banking system, which has endured a series of crises and costly government recapitalizations since the fall of the Soviet Union.

Early Monday, the European Central Bank declared a subsidiary of Sberbank, Russia’s largest bank and a target of U.S. sanctions, as failing or likely to fail. The ECB said Sberbank Europe AG and its subsidiaries in Croatia and Slovenia suffered a deterioration of their liquidity situation as customers withdrew deposits.

Russia is the world’s 11th-largest economy, smaller than South Korea, and pales in economic heft compared with the U.S. or China. Still, a major unraveling of its economy would likely blow back on trading partners and interconnected financial markets. (…)

Some fear Russia may retaliate against the sanctions by cutting off shipments of its key resources. (…)

European companies and banks in particular have exposure to Russia. Some are already reconsidering their operations there, looking to sell or write down the value of their holdings. BP PLC said Sunday it would sell its stake of almost 20% in a Russian oil company. Norway’s sovereign-wealth fund said it would look to exit around $3 billion in Russian stocks, which represent a sliver of the fund’s $1.3 trillion in assets.

The Telegraph’s Ambrose Evans-Pritchard understands what’s going on:

The West has finally taken the gloves off against Putin, and redeemed our honour Ukraine’s valiant resistance has provoked a moral scramble to be seen and counted in the melee

(…) The joint decision by the US, UK, the EU, and Canada to sanction Russia’s central bank will prevent Vladimir Putin from deploying a large part of his $635bn fighting fund of foreign exchange reserves.

It is believed that two-thirds are located at the New York Fed, or in London, Frankfurt, and other Western jurisdictions. The reserves can be frozen. Putin still has gold under his control, so brace for a crash in bullion prices as he dumps 400-ounce Soviet bars on the Dubai market, all the way down to final Tsarist bars with the imperial eagle.

If these estimates are correct – and it may not be as simple as that – Putin will no longer have the means to stabilise the rouble, or to help Russian companies cover some $330bn of external debt as repayment comes due.

This is how hyperinflation begins. A vicious circle sets in where devaluation turns manageable foreign liabilities into systemic insolvencies. (…)

Adi Imsirovic from the Oxford Institute for Energy Studies says we should brace for an energy shock. (…)

Mr Imsirovic said two-thirds of Russian oil exports are shipped by sea. This trade is already severely disrupted. Shippers are refusing to pick up Russian cargoes in the Black Sea. “Insurance premiums are going through the roof. Russian crude is trading at a discount of $11, the deepest I have ever seen,” he said. (…)

We must reckon with the real possibility that Putin will retaliate by cutting off gas flows to Europe entirely, bringing down the temple on all our heads. (…)

From the WSJ:

(…) “Symbolically speaking, it’s a nuclear bomb in the world of global finance,” said Sony Kapoor, chief executive of the Nordic Institute for Finance, Technology and Sustainability, an Oslo-based think tank. (…)

U.S. officials are looking at additional sanctions on Russia, including more restrictions on the country’s central bank, a widening of the institutions that could be banned from Swift, further export controls and more sanctions on Russian entities, people familiar with the discussions said.

Donald Trump has yet to tell us whether he thinks this is genius or not.

Genius or not, the world flow of money is getting very messy. Never good. Watch for black swans.

• Germany prepared to keep nuclear plants open to reduce reliance on Russian gas

Car Parts, Chips, Sunflower Oil: Russia’s War in Ukraine Threatens New Shortages The Russian invasion has shut down auto factories, hit supplies for the steel industry and severed transportation routes. Commodity prices are soaring, including for sunflower oil, natural gas and wheat. The two countries combined account for 80% of the world’s sunflower oil.

• Russian Planes Barred From Airspace Over Europe, Canada

U.S. Consumer Spending Rose 2.1% in January and Inflation Accelerated Amid Omicron Wave Commerce Department’s inflation gauge rose 6.1% from a year earlier

Spending rose a seasonally adjusted 2.1% in January from the previous month, rebounding from a revised 0.8% decline in December, the Commerce Department reported Friday. Personal income was unchanged on the month, following the expiration of the federal government’s monthly child tax credit. (…)

After adjusting for inflation, consumer spending was up 1.5% in January while household income after taxes was down 0.5%. (…)

Income after taxes and adjusting for inflation fell for the sixth straight month in January to the lowest level since March 2020, the Commerce Department said. (…)

The saving rate, the share of income left over after paying for expenses, fell to 6.4% in January, the lowest level since December 2013. (…)

Despite those headwinds, economists anticipate consumer spending will rise this year as the fear of Covid-19 fades and people spend down the savings they have amassed thanks to higher wages and government stimulus programs. (…)

Households are still sitting on roughly $2 trillion in savings, he said, which should help cushion the blow from higher prices.

“It’s not like households are in any danger of running out of savings,” he said. “That will allow for continued strong spending growth even as inflation is high and some of these government programs recede.” (…)

Americans’ disposable income is growing very slowly (+3.1% a.r. in the last 3 months, +2.0% in the last 2 months) while inflation is steady at 6%+ a.r..

Real disposable income has been declining every month since July 2021 (-5.5% a.r.) and is now only 1.6% above its pre-pandemic level. It is not only the expiration of stimmies: real personal income excluding transfer receipts is essentially flat over the last 6 months and down 1.8% a.r. in the last 2 months.

From a real income viewpoint, the American consumer is in recession. At a constant savings rate, real expenditures would have declined 0.5% MoM in January after the actual 0.5% QoQ drop in Q4’21.

Americans drove their savings rate to an 8-year low (6.4%) in January from 7.6% on average in the previous 3 months in order to maintain consumption. Still, real expenditures are only 4.5% above their February 2020 level. During the important October-January holidays season, real spending rose only 0.1% in total.

The so-called “excess savings” are not spurring growth, merely preventing a spending debacle. Personal savings have declined $750B in the last 6 months, $322B in the last month alone.

Spending on services continues to drag down total spending and subsidize goods purchases (blue), particularly durable goods consumption which remains 24.6% above February 2020 and 8% above trend. Real services are 6% below trend. Since expenditures on services are double those on goods, reopening services will likely drag expenditures on goods back on trend, if not below given the recent splurge.

The acceleration in wages has been very positive so far for the U.S. economy, allowing consumers to withstand sharply rising inflation. In fact, January 2022 is the first month since March 2021 where aggregate wages rose less than inflation, forcing Americans to significantly draw from their savings.

The red line below is the savings rate at 6.4%. Will Americans be willing to leverage themselves like they did during the early 2000s?

In spite of what Mr. Powell thinks and says, the labor market is not “very, very strong”, at least not strong enough to offset the effects of rising prices. That is unless wages keep accelerating.

Note the diminishing contributions of employment and hours to aggregate payrolls since September, offset by rising hourly earnings.

• Key Inflation Measure Reaches Fastest Pace Since 1983 As strong consumer demand and pandemic-related supply constraints pushed prices higher, the Federal Reserve’s preferred measure of inflation hit a new 38-year high in January.

• The New Sticker Shock With vehicles in short supply, prices are skyrocketing. Last month, 82% of new-car buyers paid more than sticker price.

(…) Many dealers say they must make do with their scant vehicle supplies and be realistic about what the market will bear, especially for high-demand models. (…) Buyers last month paid an average of $728 above the sticker, or 1.6% on average. That represents a reversal from a year earlier, when vehicles sold for an average of $2,152 below MSRP, according to Edmunds.

Vehicle stocks were about 1.1 million last month, roughly one-third the historical norm. Demand remains strong, helping push prices on both new and used cars to records.

(…) auto executives and analysts expect the dearth of new cars and lofty prices to stick around at least into 2023. (…)

Speaking of sticker shock,

Average new home prices were up a whopping 18.7% on a YoY basis and have soared at a double-digit annual rate now for eleven consecutive months (the MoM change was +3.0%). It now takes an incredible ten years of income to buy a new home — 25% above the historical norm. (…)

We have this unprecedented situation where units priced at $300k or below have nearly made it to the extinct species list — what not long ago comprised 80% of the market are now down to below a 10% share for the very first time. Meanwhile, the share of homes priced north of $500k has skyrocketed to a record of nearly 40%. Insane. Before the onset of this current bubble, it was a rarity to see any month where new home prices valued so expensively comprised even 10% of the market — that number has since soared four-fold. (David Rosenberg)

And, across the pond,

European consumers are set for the highest energy bills on record as the invasion rocks oil and gas markets. Based on current forward prices, the region’s total primary energy bill is now set to approach $1.2 trillion this year, Citi said. That’s almost $200 billion higher than the bank’s January forecast, reflecting Europe’s reliance on imports.

Oil companies, union reach deal on U.S. refinery workers pact

Oil companies led by Marathon Petroleum (MPC.N) and the United Steelworkers (USW) agreed to a new national contract on Friday for 30,000 U.S. workers in refineries, chemical plants, and pipelines, the company and the union said.

Once the deal is ratified, workers will receive a 12% pay increase over its four-year term, said three sources familiar with the matter. (…)

Talks stopped on Jan. 31 when USW negotiators rejected a 9% increase over three years and extended the current contract. basis. (…)

The pay increases are not evenly split between the four years, the sources said.

China’s Stimulus Fails to Jolt Construction in Blow to Economy

(…) Signs of sluggish construction are evident elsewhere: Copper held in warehouses tracked by the Shanghai Futures Exchange surged 28% in the week ending Feb. 18 and 17% last week, while inventories of steel rebar hit a 10-month high, according to data-provider Steelhome.

Excavator sales, a leading indicator of construction activity, fell 48.3% in January from a year ago, data from the China Construction Machinery Association showed, a deeper decline than the previous month. Meanwhile, usage of excavators fell 35% to the lowest level in a year, according to data from equipment-maker Komatsu Ltd. (…)

Property developers are the other major source of investment in China, but they are struggling with debt and falling sales. Beijing has encouraged banks to increase mortgages and cut interest rates in more cities across the country, but home sales have hardly improved, according to weekly data from major cities from China Real Estate Industry Corp.

That means property developers are still facing declines in down payments, which are one of the main remaining sources of income to pay for investment in new projects. (…)

Growth momentum is weakening, with the latest Bloomberg survey showing economists have cut their forecasts for quarter-on-quarter expansion to 1% from 1.2% previously. (…)

EARNINGS WATCH

From Refinitiv/IBES

Through Feb. 25, 472 companies in the S&P 500 Index have reported earnings for Q4 2021. Of these companies, 76.9% reported earnings above analyst expectations and 20.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 84% of companies beat the estimates and 13% missed estimates.

In aggregate, companies are reporting earnings that are 5.0% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 16.0%.

Of these companies, 77.8% reported revenue above analyst expectations and 22.2% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 21% missed estimates.

In aggregate, companies are reporting revenues that are 2.7% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 4.0%.

The estimated earnings growth rate for the S&P 500 for 21Q4 is 31.5%. If the energy sector is excluded, the growth rate declines to 23.0%.

The estimated revenue growth rate for the S&P 500 for 21Q4 is 14.9%. If the energy sector is excluded, the growth rate declines to 10.6%.

The estimated earnings growth rate for the S&P 500 for 22Q1 is 6.2%. If the energy sector is excluded, the growth rate declines to 1.8%.

Large caps’ earnings estimates continue to be revised upwards but smaller companies seem to be worrying analysts:

But S&P 500 companies are warning more negatively. Just in the past week, 19 companies offered guidance, 12 were negative and only 4 were positive.

Note also that 8 more companies (9%) than at the same time during Q4’21 have pre-announced, perhaps confirming my expectations that, after the quarter’s mid-point, more companies might need to warn of weakening demand and rising costs.

As would be expected, negative revisions are so far concentrated in consumer centric sectors: Communication Services (75.9% down), Consumer Staples (61.0%), Consumer Discretionary (60.4%) and Real Estate (57.4%). That’s on S&P 500 companies.

Looking through all U.S. companies, the problem extends to 7 of the 11 sectors:

Household Pulse: The State of Cash Balances at Year End

About the “excess savings” buffer: From JP Morgan Chase’s database covering 7.5M families.

Low-income families saw rapidly depleting balance gains following the last round of stimulus. While balances in March 2021 were roughly 120 percent higher than two years before, balances at the end of 2021 were about 65 percent higher than 2019 levels, or just under $1,300. Although higher-income families also saw depletions in checking account balances since the last stimulus, trends relative to 2019 stayed stable, remaining roughly 30-35 percent elevated through the end of 2021. Thus, even among higher income families, cash balances remain elevated over and above secular pre-pandemic trends of roughly 7-11 percent per year.

At the end of 2021, balances among low-income families were still 70% higher (~+$560) than their 2019 levels. Higher-income families had balances 35% higher or ~$1700.

JPM Chase notes that

The charts do not account for the secular upwards trend of liquid balances prior to the pandemic. JPMorgan Chase Institute research shows that during normal times, checking account balances grew by roughly 11 percent per year among balanced samples of households comparable to the one used here. In this sample, cash balances in the first two months of 2020 had grown by roughly 7 percent on a year-over-year basis. Thus, 2021 cash balances could have been up by 14-23 percent compared to 2019 levels due to these trends, independent of the pandemic and corresponding government interventions.

Using 18.5% (the mid-point of the 14-23% normal growth), end of 2021 cash balances were 16.5% and 51.5% above normal for low and high income families respectively. Inflation took 6% off purchasing power since, leaving between $365 and $510 in “excess” real savings for the average family.

U.S. New Home Sales Fell in January

New single-family home sales fell 4.5% m/m (-19.3% y/y) to 801,000 at an annual rate in January with upward revisions to sales in both November and December. Sales in December were revised up to 839,000 from 811,000 previously, and sales in November were revised up to 749,000 from 725,000 previously. The most recent peak in sales was 993,000 in January 2021. The Action Economics Forecast Survey expected 809,000 sales in January.

By region, sales in December fell in three of the four major regions, rising only in the West (1.2% m/m for the third consecutive monthly gain). Sales in the Northeast slumped 10.7% m/m, their third consecutive monthly decline to the lowest level since April 2020. Sales in the Midwest declined 3.7% m/m in January after an outsized 39.7% m/m jump in December. Sales in the South decreased 7.4% m/m in January, their first decline in three months.

The median price of a new home rebounded in January, rising 7.0% m/m (+13.4% y/y), reversing a 7.0% m/m decline in December. The average sales price of a new home rose 3.0% m/m (+18.7% y/y) in January to a record high $496,900. These sales price data are not seasonally adjusted.

The supply of new homes for sale rose to 6.1 months in January from 5.6 months in December. The recent low was 3.5 months reached in August, September and October of 2020. The median number of months a new home stayed on the market fell to 2.5 months, tying the record low reached in October, from 3.3 months in December. These figures date back to January 1975.

There are 2 distinct housing markets: the rising South and West and the weak Midwest and Northeast. I grouped them below:

CalculatedRisk’s Bill McBride adds:

The inventory of completed homes for sale was at 37 thousand in January, up from the record low of 33 thousand in March through July 2021. That is about 0.6 months of completed supply (red line). This is about half the normal level.

The inventory of new homes under construction is at 3.9 months (blue line) – well above the normal level. This elevated level of homes under construction is due to supply chain constraints.

And 106 thousand homes have not been started – about 1.6 months of supply (grey line) – almost double the normal level. Homebuilders are probably waiting to start some homes until they have a firmer grasp on prices.

Fed Officials Signal March Rate Hike on Track Despite Ukraine Central bankers stressed the need to confront the hottest U.S. inflation in 40 years.

• Fed’s Waller Lays Out Case for Half-Point March Rate Rise The central bank governor says policy makers need to respond forcefully to “alarmingly high” inflation.

(…) “We constantly say we have the tools to fight inflation, and now we must demonstrate the will to use them,” Mr. Waller said in remarks at the University of California, Santa Barbara, on Thursday evening. Inflation “is far too high and needs to come down,” he said. (…)

Mr. Waller said he would prefer to raise short-term interest rates by 1 percentage point by the middle of the year. Mr. Waller echoed another member of the rate-setting Federal Open Market Committee, St. Louis Fed President James Bullard, who has advocated a similar approach. That would likely require the Fed to raise rates by at least a half-percentage point at one of its meetings in March, May and June. (…)

Several other Fed officials, including the two members of Fed Chairman Jerome Powell’s policy-making inner circle, have recently spoken in favor of an increase of a quarter-percentage point. Those officials, New York Fed President John Williams and Fed governor Lael Brainard, have pointed to how borrowing costs for households and businesses have already risen in ways that anticipate a series of Fed rate increases this year. (…)

Earlier on Thursday, two other officials who are set to vote on monetary policy at the Fed’s March meeting—Philadelphia Fed President Patrick Harker and Cleveland Fed President Loretta Mester —signaled they favored a quarter-point increase. (…)

• How War in Ukraine Threatens the World’s Economic Recovery Bloomberg Economics examines how the conflict could impact growth, inflation and monetary policy.

• Ukraine could turn boomflation into stagflation

Russia’s invasion of Ukraine creates a new wrench in the gears of the global economy that will simultaneously worsen inflation pressures and damage growth prospects. That makes it a stagflationary shock, essentially making things worse on all economic fronts at once. (…)

• It’s not the kind of economic disruption that can be fixed with clever use of fiscal or monetary policy. It’s all pain, no gain. The effects are likely to be most severe in Europe, where economic ties with Russia and Ukraine are deepest.
• But through the deeply interconnected global financial and commodity markets, the ripples are set to spread worldwide. (…)

What we do know is that there will be continued and escalating financial sanctions on Russia, damage to Ukraine’s export industries, and high risk of further ripple effects from both physical and cyber-attacks.

• All of those amount to a negative supply shock — meaning that the productive capacity of the world economy is simply lower than it was a few weeks ago.

Higher energy prices — already evident in commodity markets — directly feed into higher inflation, but the risks are more sprawling and hard-to-calculate than that implies.

• The risk of disruption to Western European energy supplies and transportation networks, and the potential for cyber attacks contributes to the strain on global supply networks that have already been at their breaking point.

In European countries with close economic ties to Ukraine and Russia, the disruption could lower appetite for business investment and consumer demand. Who wants to build a new factory in Romania when warfare is taking place just down the road?

The United States is relatively insulated from the immediate economic damage, with its location an ocean away, strong domestic energy production, and robust (maybe too-robust) consumer demand.

• For the U.S., the direct impacts of the conflict are likely to push already-too-high inflation even higher. Those effects should on their own be short-lived, but the timing means they risk further entrenching Americans’ rising inflation expectations.
• Still, the Federal Reserve is likely to view the crisis as reason to move more gingerly in its monetary tightening campaign, as economic uncertainty grows, based on comments from several Fed officials this week.

The bottom line: Usually, geopolitical strife represents a short-term blip for financial markets and a buying opportunity for the gutsy. That could yet be the case with Ukraine, but the range of possibilities is ominous.

People Think Putin Has Called This Right and Will Get What He Wants

John Authers: I’m afraid I think this is the single best explanation [for yesterday’s rally]. The argument goes as follows:

1. It looks as though the Russian forces are making their way with relative ease so far;
2. The war aim seems to be decapitation of the regime, and installation of a Russian puppet. We can live with that; Ukraine has been run by Russian puppets before, and the world didn’t end;
3. The natural gas price dooms any chance of a strong European response.

The Telegraph’s Ambrose Evans-Pritchard:

(…) We wake up to the sobering reality that Russia is too pivotal for the international trading system to punish in any meaningful way. It influences or determines everything from bread in the shops, to gas for Europe’s homes and power plants, to supply chains for aerospace and car plants, or soon will do if Kyiv falls. (…)

Ukraine turns Putin’s neo-Tsarist empire into the Saudi Arabia of food, controlling 30pc of global wheat exports and 20pc of corn exports. (…)

So while there is brave and condign talk of crippling sanctions against Russia, it is the West’s pain threshold that is about to be tested. My presumption is that Fortress Russia will endure this contest of self-reliance more stoically than Europe’s skittish elites. (…)

Russia is sitting on $635bn of foreign exchange reserves. It has a national debt of 18pc of GDP, one of the lowest in the world. It has a fiscal surplus and does not rely heavily on foreign investors to finance the state. This renders US sanctions against new issuance of sovereign bonds a mere nuisance. (…)

The West must fall back to the next line of defence, the Nato line from Estonia to Romania, and face the long arduous task of military rearmament. (…)

Holcim Plans Multiple Price Hikes to Combat Energy Costs Energy costs account for about 10% of operating costs, and high prices already prompted the Swiss cement producer to make a number of adjustments last year

Large, Late Merchandise Orders Are Raising Companies’ Inventory Costs Transit delays are stranding billions of dollars in goods in congested supply chains, leaving companies in a cash crunch

(…) A measure of inventory costs in the Logistics Managers Index, a monthly assessment issued by Arizona State University in collaboration with other university supply-chain programs, has increased sharply since 2020, reaching a peak of 89.4 in June 2021 that was nearly 26 points higher than the same month the year before. The measure of inventory costs was 84 in December compared with 63.4 in December 2019, before the impact of the Covid-19 pandemic buffeted supply chains. (…)

Flexport said in its Ocean Timeliness Indicator report for the week ended Monday that it took an average of 109 days to deliver a container from China to its final destination point in the U.S., up from between 40 and 60 days pre-pandemic. (…)

The cash bind is particularly severe for smaller firms.

For companies with $10 million to $50 million in revenue, average inventory grew to 103 days’ worth in the second quarter of 2021 from 64 days at the end of 2019, the latest period for which data was available, according to RapidRatings International Inc., which analyzes businesses’ financial health. Companies with over $100 million in revenue kept 81 days of inventory in the second quarter of 2021, about the same level as at the end of 2019. (…)

Goldman Ups Euro-Area Inflation Forecast on Ukraine Invasion The bank raised its inflation forecast to 6.5% in May, before slowing to 5.4% by the end of the year.

China’s Economy Stabilizes With Uncertain Growth Outlook That’s the outlook from Bloomberg’s aggregate index of eight early indicators for this month. While the overall gauge was unchanged, several underlying measures worsened, suggesting an uncertain growth outlook that may require more fiscal and central bank support in coming months.

SPAC Startups Made Lofty Promises They Can’t Keep The hot upstarts that went public via blank-check companies are missing revenue and earnings targets—sometimes months after making those forecasts.