Good morning! Here’s what you need to know.
Russia invades Ukraine. Russia has taken over airspaces, airports, highways, and the regional government of the Ukrainian peninsula of Crimea, and troops are reportedly telling Ukrainians to give up arms and support the area’s pro-Moscow leaders. The move earned a rebuke from President Obama, who spoke with Russia’s Vladimir Putin on the phone over the weekend.
Then Russia pays the economic price. The Russian Central Bank hiked interest rates from 5.5% to 7% to help save its plunging currency. Meanwhile, the country’s stock market has crashed. The MICEX index is down 10%, and the country just saw its fourth straight month of manufacturing contraction. “Direct costs of war to Russia could reach at least 3% of GDP, which consists of nearly half (or about $US30 billion) of gas exports from Russia to Europe, which is carried out through Ukraine and which would most likely be disrupted in case of a war,” said Vladimir Osakovskiy, an economist at BofA Merrill Lynch. Gold rallied in the wake of the Ukraine crisis, and is up 11% since the end of December.
Problems in China. The country suffered a deadly terrorist attack when a knife-wielding group of militants killed 27 and injured 109 in a Kunming train station. On the economic side, the Chinese manufacturing sector slumped. According to Markit/HSBC, China’s PMI reading came in at 48.5, with both output and new orders falling for the first time since July 2013. China’s official PMI reading was 50.2, down from 50.5 and marking an eight-month low. Other Asian economies also contracted in their PMI reports. Check out the full recap here.
Australia contracts, Europe looking stronger. Australia’s AIG-performance of manufacturing grew to 48.6 in February, but the below-50 print means the sector is still contracting. The pivotal exports sub-index collapsed to 25.8 from 34.1. In Europe, U.K. manufacturing employment hit a 33-month high, with PMI growing to 56.9 from 56.6 in January. Eurozone PMI ticked down to 53.2, still above that 50-mark threshold.
It’s a packed day of economic data, with U.S. automakers reporting sales throughout the day. Analysts predict the annualized pace of sales grew to 15.4 million in February. “Mid-month industry reports in January saw sales rising to near a 15.8 million unit annual pace from 15.3 million in December, but instead bad late month weather resulted in a slight decline to 15.2 million,” Morgan Stanley’s Ted Wieseman wrote clients. “Weather disruptions continued into the first part of February, but improvement moving into Presidents Day weekend helped stabilise retail sales, and a rebound in fleet sales that were disrupted by weather in January is expected to provide a boost to the overall selling rate.”
At 8:30 a.m. ET, personal income and outlays will be released. Economists expect income climbed 0.2% and spending grew by 0.1% in January. “Personal income growth should rebound in January,” Wells Fargo’s John Silvia wrote. “The average workweek remained unchanged, but average hourly earnings rose 0.2 per cent over the month, along with the addition of 113,000 new jobs to the economy. Spending growth likely was more modest. After outpacing income gains the past three months, spending likely ticked up 0.1 per cent in January as cold weather kept many shoppers at home.”
We’ll also get a batch of manufacturing data. At 8:58 a.m., Markit PMI will be released. Economists believe PMI came in at 56.7 in February (anything above 50 signals expansion. Then at 10:00 a.m., we’ll get ISM manufacturing. Economists are looking for this index to climb to 52.0 in February from 51.3 the month prior. “Regional manufacturing surveys point to a slower pace of manufacturing activity in February,” wrote Nomura economists. “For example, the headline indexes in the Empire State and Philly Fed manufacturing surveys both declined in February, with the latter turning negative.”
Finally, construction spending will be released at 10:00 a.m. Economists think this declined by 0.5% in January. “Severe weather likely substantially disrupted construction in January,” said Morgan Stanley’s Wieseman.”The 16% plunge in housing starts points to a large drop in homebuilding, and we’re assuming sizable declines in private nonresidential and government spending as well.”
Global markets were lower in overnight trading. Japan’s Nikkei fell 1.27% while Korea’s KOSPI dropped 0.77%. In Europe, stocks are decidedly lower, and U.S. futures pointed to a negative open.
Warren Buffett releases his annual letter. Over the weekend, Buffett put out his letter to Berkshire Hathaway shareholders. “Over the last 49 years (that is, since present management took over), book value has grown from $US19 to $US134,973, a rate of 19.7% compounded annually,” wrote Buffett. In 2014, book value grew 18.2% — but still didn’t beat out the S&P 500. Buffett also warned about public pensions plans, writing that “local and state financial problems are accelerating, in large part because public entities promised pensions they couldn’t afford.”