MARKET WRAPS

Watch For:

Existing Home Sales for February; Federal Reserve Bank of Chicago President Charles Evans and Federal Reserve Board Governor Michelle Bowman speeches

Opening Call:

Stocks looked poised to open lower Friday as the war in Ukraine and changes in U.S. monetary policy continued to loom large.

Overseas, the pan-European Stoxx 600 declined 0.1%, while Hong Kong's Hang Seng Index slipped 0.3%, after notching the biggest two-day gains since 1998 on Wednesday and Thursday.

"Markets are trying to make sense of a hawkish FOMC that announced a dovish rate hike and believes it can tighten aggressively while maintaining growth," said Jeffrey Halley, an analyst at broker Oanda. "Not helping was a lack of clarity from the Ukraine-Russia talks, on what so much of the market's recent asset class price action has been built on."

Not much has changed on the Ukraine front. There have been mixed messages on the status of diplomatic talks, while Russia's offensive on Ukrainian cities continues. The U.S. has made further commitments of military support to Ukraine, and Joe Biden is set to speak with Chinese President Xi Jinping later Friday about the conflict.

"Biden will reportedly emphasize the U.S. will impose costs on China were it to support Russia in the conflict," said Jim Reid, a strategist at Deutsche Bank. "U.S. intelligence warned that Vladimir Putin was likely to increase nuclear sabre rattling should the war drag on. This is something that hasn't come up since three weekends ago, so worrying news."

Economic Insight:

Consumer demand in the U.S. is likely to endure the purchasing power pinch from high inflation, with real consumption expected to grow 2.7% this year, said JPMorgan.

Savings will cushion part of the hit from higher prices, and a tight labor market is set to continue to boost households' incomes, JPM said.

"With households expected to maintain a steady profile of spending growth by drawing down excess savings, we expect the saving rate to drop to 4.9% by the end of this year, the lowest in more than a decade."

Tight labor markets are a relief for lower-income households as they are able to reap the benefits of faster earnings growth.

The Fed:

Looking beyond the Federal Reserve's March meeting earlier this week, Pimco expects higher inflation and concerns about inflation prospects to continue to weigh more heavily on Fed officials than downside risks to growth in the coming months.

As a result, Pimco keeps its baseline forecast unchanged, expecting that there will be rate rises at consecutive Fed meetings and a meaningful further tightening of policy throughout the year , U.S. economist Allison Boxer says. " This faster pace of tightening raises the risk of a hard landing further down the road and suggests a higher risk of a recession over the next 2 years , " she says. (emese.bartha@wsj.com)

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Scott Ruesterholz, portfolio manager at Insight Investment said the current highs in inflation and lows in unemployment have raised concerns about the Fed being behind the curve, thus risking a hard landing into recession.

The Fed's policy trajectory remains uncertain, however, Ruesterholz said, adding that the interplay of geopolitics, inflation and growth are currently unclear. Insight Investment's base case is for five interest rate rises by the Fed this year.

Forex:

The dollar seems unable to benefit from the Fed's decision to raise interest rates and signal additional increases, said Unicredit Research.

The DXY Dollar Index was up 0.1% in Europe after falling in recent days but remains below the key 99.0000 level. Markets had already priced in a rapid increase in rates this year so the Fed's announcement Wednesday may have triggered some profit-taking to the dollar's detriment, Unicredit said.

"Hopes of a breakthrough in negotiations between Russia and Ukraine lifting market sentiment might have been another possible reason that the dollar appears to be loosening its grip."

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The Russian ruble will struggle to recover from its post-Ukraine war losses even if the country's central bank raises interest rates further in a policy decision Friday, said Commerzbank.

The analyst consensus forecast is that the central bank will leave its benchmark rate unchanged after hiking it to 20% from 9.5% in an emergency move in February but the monthly policy decision has lost much of its significance since Russia invaded Ukraine, said Commerzbank currency analyst Tatha Ghose.

Even if rates rise, it will "hardly have any supporting function" for the ruble, he said.

Commodities:

Oil prices remained volatile, holding above $100 a barrel amid warnings on supply tightness and pessimism on Russia-Ukraine peace breakthroughs. Sanctions on Russia have disrupted energy supply chains and oil has spiked as much as 30% in the span of a few weeks.

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U.S. natural gas prices could gain on higher demand for liquefied natural gas exports, said Goldman Sachs, noting high gas utilization rates at U.S. LNG export plants.

It said the Ukraine war spurred European end-users to wean themselves off Russian natural gas supply and U.S. LNG exports could fill the gap. The market also appears tight, Goldman Sachs said.

"With producer discipline still keeping supply growth well below pre-pandemic levels, we believe U.S. natural gas prices should be supported."

Read Barrons.com: U.S. Steel Slumps on Weak Forecast. But Seasonal Demand Expected to Accelerate

Other News:

The positive correlation between commodity prices and the dollar is likely to persist, said Goldman Sachs.

It said a strong dollar has historically weighed on commodities but this doesn't seem to be the case now. The current energy shortage is pushing up prices of many commodities. At the same time, the U.S. is a beneficiary of the shortage due to its position as a net energy exporter, Goldman Sachs said. This in turn is giving a boost to the dollar.

"We continue to believe that commodities will defy a strong dollar and expect the FX-commodity correlation to remain positive."

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Fears are mounting about the continued flow of Ugandan gold exports after the U.S. Treasury Department imposed sanctions on the country's largest gold refiner, African Gold Refinery, and its owner in a bid to remove conflict gold from global supply chains.

Sasha Lezhnev, policy consultant at The Sentry said the measures targeting the Ugandan entity, one of Africa's largest refiners that exports around 10 tons of gold every year, will shake up the global gold supply chain. "Turning a blind eye to conflict gold now carries a heavy price," Lezhnev said.

Ugandan gold dealers have already been embroiled in a standoff with the Ugandan government since the start of the year over new levies on gold exports.


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