Risk Assets Retreat with Syrian Conflict

Threat of War Influences Markets

Concerns over a tariff-driven trade war between the US and China took a backseat today as financial markets responded to aggressive comments from President Trump in the wake of last weekend’s chemical attack in Syria that left more than 40 people dead, the majority of whom were women and children.  The Trump administration placed much of the blame on Russia in the days following the deadly attack, and this morning US-Russian relations were further strained when President Trump threatened retaliatory action.  Trump’s tweet stated “Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia,  because they will be coming, nice and new and “smart!”  You shouldn’t be partners with a Gas Killing Animal who kills his people and enjoys it!”, with the latter portion in reference to Syrian President Bashar Assad.

US stocks struggled to extend their winning streak to three days, with major indices closing 0.35%-0.90% lower.  Updating news in the tech sector, Facebook CEO Mark Zuckerberg concluded his second day of congressional testimony, exhibiting a steady composure just as he did on day one, which was viewed by markets as a strong positive on a holistic basis.  Treasurys maintained a modest rally throughout the session, as yields/swap rates declined 1-3bps across the curve in a bull flattening pattern.  The 10-year note yield fell 2.5bps to 2.78%, and the 2s10s spread tightened to its lowest levels in more than a decade at 47bps.  In commodities, crude oil futures hit their highest mark in more than three years with the increased tension in the Middle East.  WTI crude climbed as much as 3% throughout the day, reaching over $67/barrel.

Core Inflation Breaches Fed Target

The Consumer Price Index excluding food and energy (core CPI) had its biggest annual gain in a year, meeting its market expectation of 2.1% year-over-year, 0.3% higher than the prior reading in February.  The opinion of several that inflation has been dragged lower by transient factors was reinforced with the rebound in the mobile-phone services sector, which accounted for about half the acceleration in yearly core CPI.  Other categories which drove the rate higher included shelter (hotel and motel prices), medical care, motor vehicle insurance and airfares, while the apparel and used vehicles sectors partially offset those gains.

In regulatory news, CFTC Chairman Christopher Giancarlo demonstrated his free market approach by stating that regulators should not focus their efforts on “mere incidents of bad behavior.”  He maintained that “economic freedom is an inalienable right,” but also cautioned that “freedom cannot be used to defraud in actions that ultimately undermine the free markets”.  He believes that micro managing minor occurrences of rule violations distracts regulators from their main purpose, which is to demonstrate a zero-tolerance policy for fraud, deception or manipulation.

Fed Minutes Released

In the minutes of the FOMC’s March 20-21 meeting released today, a number of participants saw the potential for a more aggressive approach to rate hikes than at previous meetings given the current state of the US economy and the expectation that inflation was approaching the 2% target set by the committee.  While the potential for more rapid rate hikes was discussed, the consensus strategy was to continue the current gradual pace of raising rates.  Though there could be a “significant boost to output over the next few years” from the increased federal spending and the tax cuts, the members of the committee were aware that the “an overheated economy could lead to significant inflation pressures or lead to financial instability.”  Members of the committee reflected that increased market volatility had generally been taken in stride.  Estimates from the meeting were mostly positive with growth predicted to be 2.7% for 2018 and the unemployment rate potentially falling to 3.6% in 2019.