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Will Oil and Inflation Undo the Bond Rally – Mar. 6, 2022

Stocks declined in volatile trading as Russia solidified its position in Ukraine. Oil prices rose over 25% for the week. Although job creation in February exceeded economists’ forecasts, comments from Fed Chair Powell assuaged interest rate concerns. Investors sought safety in Treasuries, driving yields lower.

Fighting between Russia and Ukraine entered its second week. Russia entrenched its position in Ukraine, taking control of Europe’s largest nuclear power plant on Friday. The crisis in Ukraine continued to boost oil prices. Oil exceeded $115 a barrel for the first time since 2008. Although the U. S. and its allies did not overtly sanction Russian energy, the sanctions inhibited buyers, banks, and transporters from running afoul of sanctions on the Russian financial system.

The Labor Department’s employment report showed the economy added 678,000 jobs in February, compared to economists’ forecast of 440,000. The unemployment rate fell to 3.8%, the lowest since February 2020. Wages stayed essentially unchanged from January.

Federal Reserve Chair Powell’s testimony to Congress helped to calm investors. Powell said the Fed would proceed carefully, as it learns more on the implications of the Ukraine war on the U. S. economy. Powell said he is inclined to support a 0.25% increase in interest rates in March and is “prepared to move more aggressively” later if inflation does not cool as fast as expected. He also assured that the Fed would make progress but not finalize a plan to reduce its balance sheet.

The run-up in U. S. Treasury bond yields reversed after Powell’s comments. The yield on the 10-year Treasury note ended the week at 1.72%, a drop of 0.26% for the week.

The decline in bond yields supported stocks with higher growth expectations while weighing heavily on financials.

For the week ending March 4, the S&P 500 (SPY) fell 1.3%. Five of the 11 sectors advanced.

Leading and lagging sectors as oil and inflation threaten to undo the bond rally - March 4, 2022

Leading and lagging sectors as oil and inflation threaten to undo the bond rally – March 4, 2022.

Market breadth was negative. The number of advancing stocks in the S&P 500 lagged the number of decliners by a 4-to-5 ratio.

Energy (XLE), utilities (XLU), and real estate (XLRE) bucked the S&P 500, ending above the flatline.

Financials (XLF), information technology (XLK), and communication services (XLC) lagged the S&P 500, losing 3.0% or more.

The S&P 500’s top 10 winners included the following:

1. Energy

Occidental Petroleum (OXY) +45% – Oil surged 26% in price on worries of lower supplies from Russia as sanctions impact output. Energy stocks followed the rise in oil prices. Debt-laden oil producer Occidental Petroleum surged 45% to be the week’s top performer in the S&P 500. In late February, Occidental had raised its quarterly dividend and announced a new $3 billion share repurchase program.

APA Corp. (APA) +17% and Coterra Energy (CTRA) +17% – Both oil producers rallied as part of the leading energy group.

2. Consumer Staples

Kroger (KR) +27% – The grocery chain topped analysts’ fourth-quarter EPS forecast by 23%. Kroger committed to delivering shareholder returns of 8% to 11% over time.

3. Materials

The Mosaic Co. (MOS) +21% and CF Industries (CF) +15% – Fertilizer producers soared as the price of wheat and crop nutrients surged due to concerns of supplies from Ukraine and Russia. Russia is the largest wheat exporter.

Other Top 10 Winners
The S&P 500’s top 10 winners for the week also included:

  • Clean energy company Constellation Energy (CEG) +16%
  • Defense contractor Northrup Grumman (NOC) +14%
  • Defense technology company L3Harris Technologies (LHX) +14%
  • Global media & entertainment Paramount Communications (PARA) +15%

Top ETFs for the week

The following ETFs themes worked well: commodities, metal producers, mining stocks, volatility, oil & gas producers. The top ETFs for the week include:

  • iShares GSCI Commodity Dynamic Roll Strategy ETF (COMT) +18.6%
  • SPDR S&P Metals and Mining ETF (XME) +14.2%
  • iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) +14.2%
  • First Trust Natural Gas ETF (FCG) +13.1%
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP) +12.6%

Top Fidelity Fund for the week

  • Fidelity Select Energy (FSENX) +9.5%

Will Oil and Inflation Undo the Bond Rally?

Investors will focus their attention this week on the continued impact of the Ukraine invasion on oil prices and bond yields. New data on U. S. inflation are in store as well. The Federal Reserve and earnings reports turn quiet for a change.

* Events stemming from Russia’s invasion of Ukraine will continue to dominate financial markets in the week ahead. Investors’ attention will be on oil and gasoline prices. The national average gasoline price is approaching the $4 a gallon mark. A deal between the U. S. and Iran in exchange for an end to the latter’s nuclear programs could bring 1 million barrels of Iranian oil into the global market, partly filling the Russian shortfall.

* The consumer price index (CPI) is due on Thursday. Economists expect the CPI to show a sharp rise in inflation. According to Briefing.com, economists expect the Bureau of Labor Statistics to report a 0.8% increase in the CPI in February. The CPI rose from 0.6% in January. Economists forecast the CPI to rise to 7.8% on a year-over-year in February, up from 7.5% in January.

* The relentless rise in bond yields has paused due to events in Ukraine. Investors perceive the Federal Reserve will be less aggressive in raising interest rates in the near term. Progress towards peace in Ukraine and higher-than-expected inflation would cause this perception to change. Federal Reserve officials themselves will not speak publicly next week since they are in a quiet period ahead of their March 15-16 interest rate policy meeting. Ukraine and Russia may meet on Monday to discuss a cease-fire, potentially allowing civilians to evacuate.

* This week is a quiet one on the earnings front. Campbell Soup Co. and Ulta Beauty are among the S&P 500 members reporting this week.

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