As the war drags on and hostilities temporarily slow down, the market attentions have turned to the lower demand theme which is currently being driven by some short and other more long-term developments. Crude oil is the most noticeable in this context, having shed most of its invasion-driven gains with the focus turning to China’s worsening covid outbreaks, the release of strategic reserves and a hawkish turn by the US Federal Reserve raising growth and demand concerns.
The possibility of the U.S. tumbling into a recession next year was an outcome suggested by some analysts this week after the Federal Reserve raised the prospect of faster pace rate hikes to combat high and widening inflation. The market has almost priced in ten 25 basis points rate hikes during the next ten months, with the Fed’s Bullard looking for an even faster pace. In addition, the Fed will start to aggressively trim its balance sheet from May and the reduction of liquidity will have the same impact of three or four additional 25 basis point hikes.
Inflation remains a key concern for the market and while it was talked about in 2021, it is now increasingly being felt by consumers and businesses around the world. The impact of EU gas prices trading six times above their long-term average on heating bills and energy intensive production from cucumbers to steel and fertilizer is being felt and the economic fallout can increasingly be seen.
Global food prices meanwhile remain a key concern as highlighted by the FAO Food Price Index. In March it jumped 12.6% to a record after the war wreaked havoc on supply chains in the crucial Black Sea breadbasket region, a key supplier to the global market of wheat, corn and vegetable oils. While the index was 33% higher than the same time last year, the latest increase reflected new all-time highs for vegetable oils (23.2% MoM, 56.1% YoY), cereals (17.1%, 37.3%) and meat sub-indices, while those of sugar (6.7%, 22.6%) and dairy products also rose significantly.