Prepare for Lift Off

March 04, 2022 | Matt Barasch


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This week our theme is “lift-off”. We start with the Bank of Canada, which raised its key overnight rate by 25 basis points. Followed up by oil prices, corn and wheat prices and finally the US job numbers. Buckle up and prepare for lift off.

Chart of the Week (COW)

For this week’s COW, we are going to focus on recent events. While we do not wish to downplay the rise in gasoline prices, it is important to note that with the rise in incomes and in fuel efficiency, the energy shock we are currently experiencing still pales in comparison to past shocks:

To put the current situation in an historic perspective, for current gasoline prices to reach the “consumption-intensity levels” of the 1970s and 80s, gas prices would have to more than double again from current levels.

Lift-Off

This week our theme is “lift-off”. We start with the Bank of Canada, which raised its key overnight rate by 25 basis points on Wednesday to 0.5%. This marks the BoC’s first rate hike since it slashed interest rates back in 2020 in response to the Covid-induced slowdown in the economy. The comments from the Bank in the wake of the hike suggest that there are likely at least four or five more rate hikes to come.

The second “lift-off” is oil prices, which have surged in the wake of Russia’s unprovoked invasion of Ukraine:

Brent is the primary seaborne blend of oil and thus has been the most impacted by the invasion of Ukraine. Russia is the third largest oil producer in the world after the U.S. and Saudi Arabia and while sanctions have yet to directly target the purchase of Russian oil, oil traders clearly anticipate supply disruptions.

But it has not been just oil prices that have surged. Ukraine is also one of the world’s largest producers of corn and wheat. With planting season less than two months away, we are likely to see a sharp decline in Ukrainian output, which has led to a “lift-off” of global corn and wheat prices:

We would add that corn tends to be very fertilizer intensive (little known fact that corn based ethanol gets most of its catalytic charge not from the corn, but the nitrogen in the fertilizer used to produce the corn) and we have seen a “lift-off” in fertilizer prices as demand from farmers in the U.S. and South America is expected to surge as they scramble to plant more corn.

Lastly, we will look at U.S. employment, which, as we have noted over the past few months, has still yet to reach its pre-Covid levels. That said – the U.S. added nearly 700k jobs in February. With that gain, the U.S. is now ~2 million jobs below where it was in February of 2020:

We would note that while there is still some fairway left to go before the U.S. economy gets to its pre-pandemic levels, it has made up ~90% of the Covid job losses.