Investors are still unsure what to make of the situation in Ukraine. The U.S. and NATO say Russia is continuing to build its military forces near Ukraine while Russia says it has sent some troops home.
Russian military exercises with Belarus are scheduled to end on February 20. The closing Ceremony for the Winter Olympics in China also happens to be the same day.
If there isn’t some noticeable decrease in Russia’s forces at that time, military experts think the West will amplify the pressures they are trying to put on Russia but who knows?
Turning to the Federal Reserve, the release yesterday of “minutes” from the January policy meeting confirmed what most on Wall Street already suspected – the Fed is ready to move more aggressively in the upcoming tightening cycle than what’s been done in the past. The minutes said “most” members suggested a faster pace of interest rate increases than in the tightening cycle that began in 2015. Between 2015 and 2018, the Fed lifted rates by 25 basis points a total of nine times, and never more than once in a quarter.
Most members indicated they are comfortable raising rates at consecutive policy meetings, meaning there could be multiple hikes per quarter.
Members also indicated that reductions to the Fed’s balance sheet will likely begin this year by allowing maturing bonds to roll off, though some officials did say outright selling of mortgages may be necessary.
During the 2015 tightening cycle, the Fed didn’t begin reducing its holdings until 2017. Again, Wall Street has already been expecting the Fed to act much quicker this time around so the meeting “minutes” didn’t really provide any new insights. The details as to how high and how fast rates will be raised, and when and by how the balance sheet will be reduced won’t be answered until the Fed’s next policy meeting on March 15-16.
Investor expectations for the Fed’s next moves are already extremely hawkish with the CME’s FedWatch Tool showing traders think there’s a 50% chance that the central bank hikes rates by 50 basis points next month. That’s down from earlier this month but keep in mind, it was considered a nearly 0% probability at the start of 2022.
Bulls want to believe that “Fed Fear” is mostly priced in now and that stocks prices should remain flat-to-slightly higher until the central bank reveals more details. However, there are still two key reports coming up that could significantly impact sentiment – the February Employment Report on March 4 and February Consumer Price Index on March 10. If job growth and inflation surprise to the upside, it will again stoke fears about a more aggressive Fed. The underlying fear is that the faster the Fed moves, the higher the likelihood of a policy misstep.
Data to watch
Today, investors will be digesting January Housing Starts and the Philadelphia Fed Index. Earnings of note today include Airbus, Nestle, Nice, Orange, Palantir, Roku, The Southern Company, and Walmart.
U.S. and Russian Aircraft Flew Perilously Close to Each Other Amid Ukraine Tensions The Wall Street Journal Reported… U.S. and Russian aircraft operating in the Mediterranean Sea flew dangerously close to each other in three separate incidents over the weekend, including one in which the two nations’ aircraft came within 5 feet of each other, defense officials said.
The incidents, which occurred in international airspace Friday and Saturday, involved three Russian Su-35 jet fighters crossing into the flight path of three U.S. P-8A surveillance aircraft, the officials said, and come amid heightened tensions between the U.S. and Russia over Ukraine. At the same time there are some sources reporting that Russia is bringing even more troops to the Ukraine border while others are reporting a possible retreat… so the drama continues with no one really having a clear answer.