More Thoughts on the Ukraine Crisis

The Ukraine crisis remains in the fog of war. For all the volatility, risk-off behavior in markets is modest. Treasury yields remain higher year-to-date, and the curve is not inverted. The US equity risk premium remains at the GFC mean, indicating the expected quantity of risk is normal. Spot WTI oil is over $100, but the futures curve is at $85 one year out. Market-implied inflation expectations have not budged. This appears to confirm expectations for resolution, which we think is the right bet, but leaves markets vulnerable to shocks. Strong new sanctions court a contagious default event, but central banks have gotten good at dealing with that. Russia can partially evade sanctions with barter, gold and crypto. We expect this will provide national security grounds for a crackdown on crypto by the world’s central banks. The threat to oil and gas supplies elevates energy security as both a reality and a political rallying cry, which GOP candidates will use in the mid-terms. A 50 bp hike is totally off the table for the March FOMC, but a 25 bp hike remains probable unless the crisis worsens. Higher oil prices will computationally feed into short-term inflation statistics, but the Fed will worry more about their effect on maximum employment than on stable prices.