Aurelia Butler

(Reuters) -Russia’s invasion of Ukraine has dashed any hope U.S. consumers might have had for relief from sky-rocketing inflation, with gasoline prices in the last week surging by the most in nearly 17 years and costs of other goods like food ready to march higher as well.Even before the invasion, the U.S. inflation report for February was set to show prices rising at their fastest pace in 40 years. The data, due to be released on Thursday, will likely show only a preliminary impact from the swelling in U.S. oil prices, which briefly climbed above $130 a barrel on Monday, but the spike is expected to drive overall inflation higher in coming months.”There had been expectations that February would be the high point for year-over-year headline inflation, but the Ukraine shock is already sending gas prices higher in March,” said Tim Duy, an economist at SGH Macro Advisors.The development also comes at a perilous time for the Biden administration, already under fire for soaring costs for rents, electricity and food as the economy grapples with the impact of the COVID-19 pandemic, in which demand has outstripped supply.Federal Reserve policymakers will also be keenly watching the reading, which will arrive just under a week before they gather for their next policy meeting. The U.S. central bank is widely expected to raise its benchmark overnight interest rate by a quarter of a percentage point on March 16 as it begins a tightening cycle meant to bring down inflation without derailing the economic expansion.Fed Chair Jerome Powell said last week that the central bank will act cautiously given the uncertainty of the impact of the war in Ukraine, but persistently high inflation will weigh as policymakers sketch out their forecasts at their meeting for the path of rate hikes in the months ahead.Economists polled by Reuters forecast the Consumer Price Index to have climbed 7.9% on a year-on-year basis in February, up from 7.5% in January. The monthly rate is forecast to have risen 0.8% after increasing 0.6% in the prior month.Gasoline prices increased nearly 6% in February, which would add around 0.2 percentage point to the headline number last month, but the bigger effects are still to come.The average U.S. price for regular unleaded gasoline on Monday was $4.065 a gallon, according to automobile club AAA, only about 5 cents shy of the record high. The increase over the last week of about 45 cents a gallon was the largest since 2005, it said.Russia is the world’s biggest exporter of oil and gas and a mooted ban on oil imports from that country pushed the price of Brent crude briefly above $139 a barrel on Monday.By Oxford Economics’ estimates, the surge in oil prices would add around 0.6 percentage point to the March inflation reading, but that could be easily outstripped in the coming months.Powell said last week that the Fed estimates as a rule of thumb that every $10 increase in the price of oil adds 0.2 percentage point to inflation and subtracts 0.1 percentage point from economic growth. Investment banks say crude prices could approach $200 a barrel this year if Russian supply evaporates, with dire consequences for the global economy.NIGHTMARE SCENARIOThis week’s inflation reading could show a temporary softening in food inflation in February compared to January, but any let-up is set to be short-lived.A pickup in demand for hospitality services as the economy rebalances after the disruption from the Omicron variant of COVID-19 could drive services prices higher, including for restaurants and other food-away-from-home categories, economists at Barclays (LON:BARC) noted, while the worsening war in Ukraine will now also disrupt supply chains.Russia and Ukraine export more than a quarter of the world’s wheat and Ukraine is a major corn exporter. Supply chain disruptions could add between 0.2 to 0.4 percentage point to headline inflation in developed economies in the next few months, according to Capital Economics, with higher costs for food-at-home categories persisting through the year.All of it could add up to the Fed’s nightmare scenario of inflation expectations becoming unanchored just as the central bank is being blown off course from the faster pace of rate hikes that were anticipated before the Russian invasion.”The tentative peaking of inflation expectations could be at risk, with this oil price shock possibly spilling over into higher inflation expectations in the coming months,” Deutsche Bank (DE:DBKGn) economists said. “Along with a broadening of price pressures and a tight labor market leading to accelerating wages, a renewed rise in inflation expectations could add to concerns that elevated inflation pressures are likely to prove to be far more persistent.” More

LONDON/NEW YORK (Reuters) – Beaten-down Russian assets are looking attractive to some, with JPMorgan (NYSE:JPM) strategists touting the bonds of Russian companies with significant international operations as the best way to profit from distressed pricing, while two banking sources said that loans of Russian corporates had been offered at a steep discount.Russian bond prices have fallen to record lows since Moscow invaded Ukraine as investors fret over their ability to pay as a result of coordinated Western sanctions. The United States has led the sanctions to limit the flow of Western money and to damage Russia’s economy, while Ukraine has called for the boycott of Russian energy exports. Russia’s hard-currency sovereign bonds mostly traded well above par until mid-February, as investors shrugged off Moscow’s troop build-up on Ukraine’s border and U.S. warnings that an invasion was imminent. The decline since has been rapid, with longer-dated issues now indicated at around 20 cents in the dollar, although trading has all but ground to a halt.The Ukraine crisis has raised the spectre of Russia’s first major default on foreign-owned sovereign bonds since the years after the 1917 Bolshevik revolution. Russia said on Sunday that payments would depend on Western sanctions.But in a March 4 note to clients a team of JPMorgan’s strategists led by Zafar Nazim said their top pick was Lukoil bonds, because the energy giant had substantial standalone international operations, which generated $3.5 billion in earnings in 2021, and relatively low foreign debts. In the note, titled “If Ifs-And-Buts-Were-Candy-And-Nuts Recovery Analysis”, the JP Morgan strategists said investors could make huge returns should the company repay its debts.Two banking sources said there was some activity in the secondary market for some distressed Russian corporate loans last week, with some market participants trying to trade the paper at a discount. While sanctions make it virtually impossible to trade in any sanctioned Russian entity and in rouble-denominated assets, Western investors can still trade in the bonds of Russian companies not on the sanction list and which have dollar bonds.Lukoil bonds were quoted at a mid-price of 32 cents in the dollar on Friday, with bid/ask spreads of around 10 cents pointing to a highly illiquid market. JPMorgan strategist said they could recover to 100 cents on the dollar.They also upgraded bonds issued by Novolipetsk Steel, saying current prices did not reflect the recovery potential, as well as steel giant MMK’s 2024 bond.”Our analysis is based on recovery from international operations, supplemented by potential claim on international receivables,” the strategists wrote.Russian companies are not currently prohibited from making payments to overseas owners of their debt, and many earn sizeable foreign exchange from export sales. But that could change if Russia’s government imposes restrictions, or if the companies’ financial conditions worsen or if they become unwilling to pay, potentially leading to an “event of default (EoD)”.”An EoD by Russian issuers is a high risk though some issuers with substantial international operations (e.g. Lukoil) could continue servicing debt,” the strategists said.JPMorgan’s strategists added that repayment of bonds currently due, including one from gas giant Gazprom (MCX:GAZP), would not necessarily mean other borrowers would repay too.An investment firm, which held some of Gazprom’s $1.3 billion bond maturing on Monday, has received its full payment due in U.S. dollars, a person at the firm said. More

HOUSTON (Reuters) -Russia’s invasion of Ukraine is a “big wake up call” for European governments hoping to balance the need for fossil fuels with environmental concerns, the head of French energy giant TotalEnergies said on Monday.Europe depends on Russian natural gas, which supplies around 40% of its needs. On Monday, benchmark gas prices shot to their highest on record, as traders worried Russia could curtail supplies.”What is happening today in Europe is a big wake up call to a lot of policy makers if they are serious about security of supply, affordability and of course climate change compatibility,” TotalEnergies Chief Executive Patrick Pouyanne said at the CERAWeek energy conference in Houston. “We must think about the three parts of this triangle and not think that only one part is important.”Europe aims to sharply reduce its reliance on fossil fuels in the coming decades to battle climate change, with governments restricting oil and gas production and financing of fossil fuel projects. While Europe’s solar and wind power generation capacity has grown sharply in recent years, its power and energy systems remain heavily reliant on natural gas and coal.Pouyanne said Europe needs to build more infrastructure to import additional LNG if it wants an alternative to Russian gas.”The reality in Europe is that we don’t have enough re-gas terminals today to replace the volume of piped gas from Russia by LNG.”NO PRESSUREPouyanne said TotalEnergies did not come under government pressure to fully exit Russia following the Ukraine invasion.TotalEnergies is the only major Western energy company that does not plan to fully exit Russia; BP (NYSE:BP), Shell (LON:RDSa) and Exxon (NYSE:XOM) all announced their intentions to withdraw. TotalEnergies has said it will halt all new spending in Russia.The French oil major holds a 19.4% stake in Novatek, Russia’s largest producer of liquefied natural gas (LNG), as well as a stake in the Novatek-led Arctic LNG project.”I had discussions obviously with the highest authority in my country and there is no push from them for us to exit Russia,” Pouyanne told a gathering of energy executives. Pouyanne said that Western sanctions on Russia exclude natural gas and that it would therefore be inconsistent for companies that produce the gas to exit the country. TotalEnergies nevertheless has stopped buying oil from Russia, Pouyanne added, although one its landlocked refineries in Germany continues to receive Russian crude by pipeline. More

(Reuters) – Global financial conditions, perceived as strongly correlated with future growth, are at the tightest in two years, driven by soaring energy prices, sliding stocks and the market fallout from the Ukraine-Russia conflict.Financial conditions is the umbrella phrase for how metrics such as exchange rates, equity swings and borrowing costs affect the availability of funding in the economy. How loose or tight conditions are dictate spending, saving and investment plans of businesses and households. Goldman Sachs (NYSE:GS), which compiles the most widely used financial conditions indexes, has in the past shown a 100-basis-point tightening crimps growth by one percentage point in the coming year, with an equivalent loosening giving a corresponding boost.The tightening is an unwelcome development for a world economy already threatened by the fallout from $120-a-barrel oil prices and supply chain setbacks caused by sanctions on Russia. (Graphic: GS global financial conditions, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwaqwwvo/KNQdg-global-financial-conditions-tighten-to-pandemic-levels.png) If these drive inflation steadily higher, and “if the central banks take their mandates seriously, you will see a further (tightening) in financial conditions,” said Rene Albrecht, strategist at DZ Bank. “Economic dynamics will slow down further, inflation will be high nonetheless and you will see second round effects and then you get a stagflation scenario,” he added, referring to a combination of rising inflation and slower economic growth. Goldman Sachs’ global financial conditions index (FCI) is at 100.2, 60 basis points (bps) tighter than prior to Russia’s invasion of Ukraine and a level last seen in March 2020, when the pandemic first hit. The rise was led by its Russian FCI, which rose as high as 114.8 from around 98 at the start of February to the tightest since the 2008 crisis, driven by a doubling of interest rates and a market implosion. The Russian move has taken an emerging markets FCI to the tightest since 2016. (Graphic: GS Russia financial conditions, https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrlqrevm/aWMrB-russian-financial-conditions-tighten-to-gfc-levels-nbsp-.png) Euro zone moves are sizeable too. Conditions in the bloc, heavily reliant on Russian energy, are at the tightest since November 2020, having moved 50 bps in February, driven also by the European Central Bank (ECB) opening the door to rate hikes this year. Viraj Patel, global macro strategist at Vanda (NASDAQ:VNDA) Research, said financial conditions would take on even more importance for the ECB, which meets on Thursday.Should it proceed with the unwinding of bond purchases followed by rate hikes as expected before the invasion, financial conditions could tighten to levels seen at the height of the pandemic or even the bloc’s sovereign debt crisis a decade ago, he added. U.S. conditions have tightened to a lesser extent. But the indicators Goldman uses to calculate its indexes signal no relief; safe-haven flows are boosting the U.S. dollar, which is near two-year highs, and world stocks have fallen 11% this year, led by a near-20% fall in euro zone equities. U.S. investment-grade corporate bond risk premia have widened 40 bps year-to-date as investors assess the hit to companies’ profits. With conditions historically loose in developed markets, policymakers may not be too perturbed yet. On an inflation-adjusted basis, borrowing costs have fallen sharply, hitting a record low -2.5% in Germany on Monday. Peter Chatwell, head of multi-asset strategy at Mizuho, said that gives central banks “more room to speak hawkishly and for those that are on the brink of acting hawkishly, acting hawkishly.” (Graphic: GS euro area financial conditions, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxokjogpx/xoJke-euro-are-financial-conditions-at-tightest-since-late-2020-nbsp-.png) More

Just as aviation was soaring away from the pandemic, it has flown into a fresh storm. On Monday, the cost of crude leapt on the prospect of a US-led embargo on Russian oil exports. Global oil prices have risen nearly two-thirds since the start of the year. Shares in airlines nosedived on Monday.No wonder. Aviation is the most oil-intensive sector of all, according to ING. For every €1mn of value added output, Europe’s aviation industry uses 60 terra joules of energy. Shipping is close behind, followed by the chemicals industry.Fuel accounts for 25-40 per cent of airline operating costs. Many airlines have hedges in place. London-listed Wizz Air, normally a holdout, said on Monday it too would cap its fuel cost exposure. But pricier fuel and the need to fly longer routes to avoid Russian and Ukrainian airspace, will still hurt airlines. Commercial aviation cannot usually rely on passing extra costs on to customers. Northern Europeans are desperate to travel but also constrained by a broader jump in their cost of living. European nations have meanwhile given some flag carriers financing to hold prices down in the form of pandemic bailouts.Other transport companies will be hit too. Fuel is about a tenth of bus companies’ costs, though demand for public transport should increase as travellers are priced out of their cars. Shares in London-listed public transport companies Go-Ahead and FirstGroup fell by 6 per cent on Monday morning. Logistics companies will also be in the spotlight, though the typical “costs plus margin” contracts should allow them to pass on higher fuel expenses.For many developed economies, the situation is less bleak than during previous oil price spikes. A shift to services and greater energy efficiency has reduced intensity — total energy consumption per unit of GDP — by over a third globally since 1990.Yet higher transport costs will ensure the effect of more expensive crude will be felt across the economy. Household budgets will be stretched and business profits will be squeezed. If the oil price rise is sustained, the pain will be widely shared. More

The writer is economic adviser to the president of UkraineThe brutal Russian invasion of Ukraine is destroying a country, displacing millions of people and ruining lives. Vladimir Putin has already come close to causing a major nuclear disaster and appears to have plans for more. In addition, Russian violence is creating a global food security crisis. Ukraine is the world’s fifth-largest exporter of wheat, but farmers cannot now start what is called their spring sowing campaign. The regular window for starting field work is the first 10 days of March, and planting needs to be fully completed in the last week of April. We have highly productive soil, but also a climate that sets the rules. There is already no way that Ukrainians will be able to sow this year based on a normal schedule. Those parts of Ukraine which are most productive in terms of agricultural production are now consistently under aerial attack and artillery bombardment. Working the fields in regions such as Chernihiv, Poltava, Kharkiv, Sumy, and Zhitomir has become practically impossible.According to regional administrators, some of these fields are likely to be mined or contain unexploded ordnance. Even when we are ready to start ploughing and planting, anti-mining and ordnance measures will be essential — and we urgently request help from all civilised countries in that task.Ukrainian farmers are resilient. But they also have other important tasks at hand. These currently include capturing Russian military equipment, blowing up fuel convoys, and allowing demoralised Russian soldiers to talk with their mothers. We are a humane and innovative people, but we also know what our priorities must now be. Our tractors should be ploughing fields and feeding the world, but instead too many of them spend time towing broken down and captured Russian equipment. All that deadly junk will be recycled, of course, but we would much rather be busy growing the food that people everywhere need to survive.If this war is not stopped immediately, the world will experience a drop of global supply between 10 per cent to 50 per cent of major agrarian products including wheat, barley, corn, rapeseed, and sunflower oil. In recent decades, because of smart investments, increased productivity, and overall efficiency, Ukrainian agriculture provided a major buffer for the food security of billions of people around the world. Western companies that have worked with us on this vital endeavour are a vital part of our on-ground team.But agricultural commodity prices have already increased and, once markets realise the full depth of Putin’s madness, we should expect them to spike further. Rich western countries may think they are less exposed, due to the nature of their food consumption, with more meat and less bread in their diet than poorer ones. But higher commodity prices increase the cost of livestock feed and will provide a further boost to inflation pressure in the US, the EU, the UK and all developed countries.The price tag for supporting poor people worldwide will increase substantially. On the Chicago Commodity Exchange prices for wheat already demonstrate substantial growth. To avert widespread hunger, massive budget pressures and further inflation shocks, the world needs to act very quickly. All possible measures to stop Putin’s troops must be on the table — including steps that would have been unimaginable 10 days ago. The food production clock is ticking. Each extra day of the Russian war against Ukraine threatens to push the world into a new Dark Age. We will emerge victorious and every Russian tank and armoured vehicle will be destroyed or sent back home. But the human cost will be enormous. This cost will mostly fall on Ukrainians and the unfortunate Russian conscripts sent to fight us. But it will also fall on people around the world who worry about how much food they can afford to buy for their families.To stop Russia, it is essential to impose a full set of sanctions on Russian energy exports immediately — this will reduce the finance available for Putin’s war machine. We are calling on all energy producers to step up and help ensure that effective sanctions do not push up fuel prices. Russian oil and gas are already the equivalent of blood diamonds. If you buy Russian energy products, you are directly financing the killing of Ukrainian children, the forced displacement of millions of people and the disruption of global food supply chains. Putin’s war threatens famine and global famine always brings disease.The Russian bell tolls for people who consume food everywhere. More