March 25th, 2022
Bulls made it a second consecutive winning week, shaking off hawkish remarks from Federal Reserve Chairman Jerome Powell on rates as well as rising oil prices. Powell rattled nerves on Monday when speaking at the Economic Policy Conference before the National Association for Business Economics, where he indicated that the Fed would be aggressive on inflation and could hike rates half a percentage point at its future policy meetings. He reiterated that although the option is on the table, no decision has been made to do so. Oil prices were once again on traders’ radar with West Texas Intermediate (WTI) crude rising to $113 a barrel, up roughly 7.00% from a week ago. An attack on an oil facility in Saudi Arabia on Friday added to tensions over already tight supplies in the oil market as the Russia-Ukraine war surpassed the one-month mark. Ukraine appears to still be very much in the fight. Reports this week showed battle lines shifting with Ukraine going on the offensive and regaining territory around the capital of Kyiv. Senior U.S. officials have called Ukrainian forces “able and willing” to continue expanding their offensive campaign to other Russian-held regions. While this is certainly good news for Ukraine, and democracy in general, it likely means the war will continue to keep commodity markets in flux for the foreseeable future. It was a choppy week for markets, but one in which the S&P 500 finished up 1.60%, with durable goods orders and new home sales being the economic highlights of the week.
New Home Sales Cool
New homebuyers cooled on homes in February as the average ticket price of a home hit $511,000. Sales fell -2.00% to an annual rate of 772,000. The reading pushed year-over-year sales down more than -6.00%. The decline in sales and rise in prices came despite home builders adding more homes to existing inventory. The supply of new homes rose to 6.3-months at the end of February from 6.1 in January. While the increased supply is welcomed news, high prices and rising mortgage rates are causing homebuyers to pause their home search in hopes that even more supply will help cool prices in the coming months. Home builders have managed to navigate high materials costs, labor shortages, and supply challenges over the past couple of years, but even if supply chain constraints ultimately ease, the housing market is expected to remain tight for some time.
Durable Goods Orders Hit the Skids
Orders for durable goods—products meant to last at least three years—slipped -2.20% in February to a seasonally adjusted $271.5 billion. This was their first drop in five months. The decline was concentrated in the highly volatile passenger plane and auto segment, down -30% and -0.50%, respectively. Core capital-goods, which are new orders for nondefense capital goods excluding aircraft, fell -0.30% month-to-month to $80.1 billion. Shipments, however, rose 0.50% to $79.7 billion. It’s still too early to tell if the dip is a sign of waning demand amid high inflation or businesses struggling to obtain materials due to supply chain constraints. The March durable goods report should provide greater clarity on the impact recent geopolitical events have had on business investment.
It was a very light week for economic news, leaving markets to focus on the big three: rate hikes, inflation, and the Russia-Ukraine conflict. Although markets fully understand that rates will be moving higher in 2022, they remain uncertain as to how aggressive the Fed will be in its monetary policy tightening. This week, the Fed Chairman managed to throw the market a curveball. Investors have been highly attuned to any signals of a 0.50% rate hike because in raising rates in larger steps, the likelihood increases that the Fed over corrects, kills demand, and sends the economy into a hard landing. After having taken a 0.50% rate hike off the table prior to March’s FOMC meeting, where the Fed raised by 0.25%, Powell put a 0.50% rate increase back on the table with his comments on Monday. This was really just a case of the market not liking being reminded of what it knows to ultimately be true. By week’s end, the markets found comfort with the second part of Powell’s statement where he reiterated that no decision had been made with respect to the timing or magnitude of any future rate hikes. The central bank’s next FOMC meeting is set for May 3-4, which provides a couple of weeks for the Russia-Ukraine conflict to deescalate somewhat and hopefully alleviate some of the commodity pressure. Since commodities and oil are playing such a large role in broader inflation, any downward inflection in those commodities could alter just how aggressive the Fed feels that it needs to be with its next round.
The Week Ahead
It will be a big week for markets with reports on non-farm payrolls and manufacturing.
Earlier this week, the U.S. Senate passed legislation that would make daylight saving time (DST) permanent starting in 2023, ending the twice per year changing of clocks. The bill known as The Sunshine Protection Act was introduced by Florida Senator Marco Rubio and co-sponsored by a bipartisan group of 18 senators.
Supporters of the legislation argue that the time changes in the fall and spring are disruptive to individuals and businesses, hurt sleep, and pose health and safety concerns. The legislation selects the “spring forward” mode as the permanent time, thus shifting daylight hours to later in the day and providing more sunlight in the evening. Proponents also argue that with a later sunset, people would stay out longer, spend more time outdoors, and possibly spend more on restaurants, shopping, and entertainment.
The Sunshine Protection Act must still pass in the House of Representatives and, if it does, then it would go to President Biden to sign. The incredible unanimous passage of the bill in the Senate this week doesn’t mean that there aren’t opponents, and many Americans are casting shade on the idea of darker mornings.
A permanent DST means that parts of the country would not have sunrise until after 9:30 a.m. in the winter months. This debate is a great example of history repeating itself. The U.S. tried a permanent switch to DST in the 1970s during the energy crisis. It was very unpopular as Americans realized they disliked starting their days in darkness more than changing their clocks. It also did not reduce energy consumption as intended. The U.S. also enacted DST during both World Wars and ended up repealing it both times.
Time changes in the U.S. date back to the late 19th century. Prior to 1883, time was determined locally with the majority of areas using the position of the sun as a reference for local time. In order to maintain accurate train schedules and prevent crashes on railroad tracks used by multiple locomotives, the railroad industry created a universal time standard by dividing the continent into official time zones with one standard time for each zone. By 1918, the U.S. government took control over the time standards, passed the Standard Time Act, and implemented the first DST on March 31, 1918.
DST was introduced as a wartime measure to conserve fuel during World War I with the idea that moving the clock around would help maximize the useful hours of sunlight, thus saving the fuel otherwise needed for lights. The cost savings did not seem to materialize, so Congress repealed the act in 1919 before the war ended.
Following the repeal, individual localities could decide whether and when to move forward or back, creating no uniformity and much confusion. A year-round national DST returned during World War II but was repealed three weeks after war’s end, and the confusing hodgepodge resumed. States and localities could start and end daylight saving whenever they pleased, a system that Time magazine described as “a chaos of clocks.” In 1965 there were 23 different pairs of start and end dates in Iowa alone. Passengers on a 35-mile bus ride from Ohio to West Virginia, passed through seven time changes. It was not until 1966 that Congress passed legislation setting a nationwide time standard. The Uniform Time Act of 1966 helped restore a standardized DST from the last Sunday in April to the last Sunday in October, although states had the option of remaining on standard time year-round.
The Federal law was amended in 1986 to begin DST at 2:00 a.m. on the first Sunday of April and end at 2:00 a.m. on the last Sunday of October. The Energy Policy Act of 2005 extended DST in the U.S. beginning in 2007, though Congress retained the right to revert to the 1986 law should the change prove unpopular or if energy savings are not significant. Since 2007, DST in the U.S. begins at 2:00 a.m. on the second Sunday of March and ends at 2:00 a.m. on the first Sunday of November.
The House of Representatives has no immediate plans to vote on the bill the Senate passed earlier this week, and the White House has not said whether Biden supports it.
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