Stagflation Fears Flare Up

2s10s spread declines to 20bps, approaching recession territory. A negative spread between 2-year and 10-year Treasury yields has a near-perfect record of predicting recession within 18-months, and while the spread isn’t negative yet, it has collapsed to 22 basis points after starting out the year at ~0.80%. Fears of an oil supply shock from Russian sanctions are the latest risk troubling the market, a dangerous addition to already elevated inflation levels. The combination of inflation and a contracting economy, otherwise known as “stagflation”, leaves central banks in the unenviable position of choosing between price controls and maximizing economic growth.

Crude oil hits highest level since 2008. U.S. secretary of state Antony Blinken said that the U.S. and its allies are in “active discussions” on banning purchases of Russian oil. The commodity has been largely spared from the other sanctions enacted by the U.S. and its NATO allies, and represents about 8% of all crude oil imported into the U.S. each year. Contracts for crude jumped sharply higher on the day, climbing as high as $130/barrel before moderating to $120- the highest level since 2008.

U.S. equities approach bear market. U.S. stock indices all closed lower today- the DJIA, S&P 500 and Nasdaq closing down 2.3-3.6%. While the indices have fared better than their European counterparts, all three are significantly lower since the start of the year. The S&P 500 sits down nearly 12.41% from its all-time high established at the end of 2021.