A crisis of its own making

Delivered on By Justin Pyvis

Good morning! As ScoMo recuperates from COVID-19, Australia’s Defence Minister Peter Dutton implied that Ukraine’s only hope is China:

“The pressure really should be on President Xi to pick up that phone and, instead of offering comfort, offering words of direction to President Putin that he should withdraw from the Ukraine as quickly as possible.

Hopefully [Russia’s] force is repelled eventually but at the moment, when you see capital cities being encircled, it is difficult to see a different outcome.”

Well, damn – we hope he’s wrong!

Reading the tea leaves

Daily % change







AU Bond



US Bond









Brent (bbl)



Gold (oz)



Iron ore (t)









Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was up +2.06%, with all 11 sectors rising as the index regained some of its losses from the last few days.

Markets were put at ease after Federal Reserve Chair Jerome Powell told the US House of Representatives Financial Services Committee the Fed “will proceed carefully as we learn more about the implications of the Ukraine war”, added that he supported a 0.25% hike, effectively taking a larger 50 basis point rate increase off the table.

Locally, the ASX200 (+0.22%) again shrugged off the European crisis to finish in positive territory for a third straight day this week.

The big winners were the usual suspects of energy (+4.9%) and materials (+2.8%), which rose following surging oil and commodity prices, respectively, with both Russia and Ukraine large exporters of various primary resources.

The S&P GSCI index, which tracks global commodity prices, hit its highest level since 2011 yesterday. After European markets closed the price of Brent crude topped $US115 per barrel, the highest since 2008.

Food for thought

Australians – especially those in the locked down states of NSW and VIC – made up for lost time in December, increasing their consumption of goods and services.
Australians – especially those in the locked down states of NSW and VIC – made up for lost time in December, increasing their consumption of goods and services. Source

The Australian economy expanded by +3.4% in the December quarter of 2021, the strongest quarterly increase since the March quarter of 1976 as the economy rebounded from a lockdown-induced contraction in the September quarter. Compared to a year earlier, the economy grew +4.2%.

The increase was driven by domestic demand “with high levels of household spending, particularly in the states that emerged from COVID-19 lockdowns”. While the impressive figure was still slightly below some expectations, it was well below the 5.0% annual growth the Reserve Bank of Australia (RBA) was forecasting.

Detracting from growth was net trade (-0.2 percentage points) as iron ore prices dipped causing export prices to fall -0.4%, while import prices shot up +5.8%, leading to a terms of trade decline of -5.1% – the largest fall since June quarter 2009. Investment also detracted from growth, both private (-0.3 percentage points) and public (-0.1 percentage points).

Nominal gross domestic product (GDP) – that is, GDP at current prices without an inflation adjustment – again grew in the double-digits (+10.2%) in the December quarter, which is probably around twice as fast as it expands in “normal” times with moderate inflation. That suggests the RBA’s official measure of inflation, the consumer price index – which is based on a narrower fixed basket of goods and rose 3.5% during the same period – might be showing an incomplete picture.

Indeed, the last time Australia’s nominal GDP grew in the double digits for three consecutive quarters was when inflation was averaging closer to 10% in the late 1980s, only falling after the “recession we had to have”.

Rising import prices, falling investment and slower than expected real economic growth puts the RBA into a bit of a pickle as it decides what to do about rising consumer price inflation. According to EY chief economist Jo Masters:

“These are murky waters for the RBA – with COVID-19 impacted data on one hand and a barrage of anecdotes about rising wages on the other. We continue to see the RBA as being patient, waiting for the data to provide greater clarity.”

We tend to agree about the RBA remaining patient, despite the balance of risks having shifted from disinflation to inflation.

But it may not be long before the RBA finds itself in a crisis of its own making, as is happening in New Zealand and many other countries around the world, where complacency around “transitory” inflation left central banks with the difficult task of “getting on top of super-charged inflation without an outright recession”.

Chewing the fat

Bits and bytes

⛈️ The federal government has now received 145,000 claims for the one-off $A1,000 disaster recovery payment, 14x more than during the 2021 floods.

🌊 S&P Global Ratings predicts flooding on the east coast will lead to “insured losses of at least $A1 billion and possibly $A2 billion, making it one of Australia’s worst flood events on record”.

👐 The WA border reopened after being closed to various parts of Australia and the rest of the world for 696 days.

📣 US President Joe Biden’s State of the Union address alleged that “Putin’s war was premeditated and unprovoked. He rejected efforts at diplomacy. He thought the West and NATO wouldn’t respond… Putin was wrong. We were ready.”

🙊 During the same speech Biden accidentally referred to Ukrainians as “Iranians”.

🗺️ The President of Belarus, Alexander Lukashenko, may have accidentally broadcast an actual invasion map on state TV showing “Ukraine military facilities destroyed by missiles from Belarus” and “Ukraine is divided into 4 sectors”.

⛽ According to US intelligence, the 64 kilometre-long convoy of Russian vehicles approaching Kyiv “has been hampered by fuel and food shortages”, halting its progress.

⭕ British intelligence indicated that “three cities — Kharkiv, Kherson and Mariupol — were encircled by Russian forces”, with the mayor of Kherson suggesting that the southern Ukrainian city has fallen.

🍎 Apple “paused all sales inside of Russia and will stop all exports into the country”.

✋ Austria’s government broke with its 60-year constitutional policy of “permanent neutrality” to condemn Russia: “Withdraw your troops. End the bloodshed. It is time to return to the negotiating table.”

📈 The Bank of England’s Michael Saunders said the risks were tilted towards “stronger and more persistent inflation pressures”, due to “significant excess demand… inflation expectations are not as well anchored as I would like”.

🍁 The Bank of Canada raised its cash rate by 25 basis points to 0.5%, the first time it has raised rates since 2018.

⛏️ The world’s largest commodities trader, Glencore, is “reviewing its business ties with Russia”. It has Russian investments worth at least $US1.3 billion.

🛢️ ExxonMobil is “beginning the process to discontinue operations and developing steps to exit the Sakhalin-1 venture [it owns 30% of the $US10+ billion project]”, and “will not invest in new developments in Russia”.

✈️ Boeing announced that it was “suspending parts, maintenance and technical support services for Russian airlines”. More than 30% of national carrier Aeroflot’s fleet are Boeing aircraft.

🤒 ScoMo’s assistant Ben Morton also tested positive to COVID-19 yesterday morning but only has “a mild headache”.

🏃‍♀️ The UN reported that more than 670,000 people have fled Ukraine.

🚢 The massive cargo vessel carrying up to 4,000 luxury cars from Germany to the United States sank in the mid-Atlantic, 13 days after it caught on fire.

⚾ Major League Baseball cancelled the first two series of its regular season, due to start on 31 March, “after it failed to reach a labour agreement with players”.

⚽ Chelsea owner Roman Abramovich confirmed he will sell the Premier League club for £3 billion, writing off loans to the club worth £1.5 billion in the process, with all profits from the sale to go to victims in Ukraine.