Russia’s Revolt Has Made the Fed’s Inflation Fight Even Harder. Here’s Why.

It creates a lot of uncertainty, and markets tend not to like that. When Russia invaded Ukraine in February 2022 oil prices spiked on concerns that production would be hit, rising to almost $140 the following month.

The disruption never came—despite Western sanctions, Russia’s oil continued to flow to Asia and global markets continued to function. Prices are now around $70 a barrel.

Russia has every incentive to keep the oil flowing, whoever’s in charge. But bad things can happen amid disorderly change. Imagine what would happen to the price of crude if disruptions were more than a worry—if the global oil market really did suddenly face a drop in supply.

The potential for another energy price spike would upend the Federal Reserve’s and other central banks’ forecasts that show inflation steadily marching back toward target. The Bank for International Settlements on Sunday warned that the battle to put the inflation toothpaste back in the tube is far from won, now that it has seeped into wage demands and companies’ price setting.

Much of the drop in inflation is, in fact, due to “supply chains easing and commodity prices falling,” the BIS said. “The last leg of the journey to restore price stability will be the hardest.”

Indeed. The latest events in Russia could make it even harder.

—Brian Swint

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‘Cracks’ in Putin’s Grip: Blinken

The central figures in the weekend revolt in Russia—President Vladimir Putin and Wagner Group paramilitary leader and Putin protégé Yevgeny Prigozhin—remained out of the spotlight on Sunday. Prigozhin’s advance on Moscow and sudden retreat still left questions about Putin’s grip on power.

• Secretary of State Antony Blinken said Prigozhin’s actions showed “real cracks” in the regime in Moscow, where Putin has held power for two decades. Blinken told CBS’s Face the Nation the “distraction” creates an opportunity for Ukraine’s counteroffensive to Russia’s war there.

• President Joe Biden talked with Ukraine President Volodymyr Zelensky on Sunday about the counteroffensive and events in Russia, the White House said. China’s foreign minister met with Russia’s deputy foreign minister in Beijing on Sunday, Bloomberg reported. China has boosted ties with Russia.

• The uncertainty could spill over into the markets, according to Clocktower Group’s chief strategist Marko Papic. Traditional safe-havens such as gold and the U.S. dollar could see a near-term pop and oil prices could move.

• Helima Croft, the head of commodity strategy at RBC Capital Markets, said in a note on Sunday that the risk of further civil unrest in Russia, one of the biggest oil producers, must now be factored into the firm’s oil analysis for the second half of 2023.

What’s Next: How the crisis shakes out longer term is something officials are monitoring closely, Blinken said Sunday. “We can’t speculate or know exactly where that’s going to go. We do know that Putin has a lot more to answer for in the weeks and months ahead.”

—Liz Moyer

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Bank Supervision Preferable to Higher Capital Requirements: Bowman

Federal Reserve Gov. Michelle Bowman said U.S. banks need more supervision rather than higher capital requirements, which she said could hurt lending and competition. She told an audience in Salzburg, Austria, on Sunday that an independent third party should examine recent U.S. bank failures.

• Despite recent banking stress, the banking system is strong and resilient, Bowman said. “Banks today are much better capitalized, with substantially more liquidity, and are subject to a new range of supervisory tools that did not exist” before the 2008 financial crisis.

• Raising banks’ capital requirements could increase costs, cause banks to offer fewer products and services to consumers, or push more financial activity out of the regulated banking system to nonbank competitors, she said. The Fed’s 2023 bank stress test results are due out Wednesday.

• The annual tests determine how much money banks can return to shareholders in buybacks and dividends. This year’s hypothetical stress scenario included U.S. unemployment peaking at 10%, an increase in market volatility, widening corporate bond spreads, and a collapse in real estate prices.

• For the first time, this year’s test features an “exploratory market shock” to large bank trading books. Critics have said past tests failed to measure the effect of rapidly rising interest rates, a real-world scenario that sparked the failures of Silicon Valley Bank and others this year.

What’s Next: Fed Chairman Jerome Powell told the Senate Banking Committee that the largest lenders could face a 20% increase in capital they have to set aside. The new rules, which are still being formulated, would be skewed toward the eight largest U.S. banks.

—Janet H. Cho

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New Home Sales, GDP, Other Inflation Data This Week

As June and the first half of the calendar year draw to a close this week, expect more inflation data and a handful of remaining earnings reports from big companies including
Micron Technology
and Walgreens Boots Alliance. Federal Reserve officials are closely gauging price data heading into their July meeting.

• Micron, reporting Wednesday, is expected to post a loss of $1.60 a share in the fiscal third quarter on sales of $3.7 billion, compared with a $2.59 a share profit on $8.6 billion of revenue a year earlier. Micron stock is up 31% this year on hopes chip demand will start to rebound.

• Walgreens,
  reporting Tuesday, is expected to report earnings per share of $1.07 on revenue of $34.2 billion, and a 6% rise in same-store sales for the fiscal third quarter.

• May single-family home sales on Tuesday are expected to be a seasonally adjusted 659,000 annual rate, down 24,000 from April, amid continued signs that high interest rates are keeping sellers and buyers on the housing market sidelines.

• The latest reading of first-quarter gross domestic product from the Bureau of Economic Analysis on Thursday is expected to show a 1.4% annualized rate, slightly higher than the BEA’s second estimate in late May.

What’s Next: The BEA’s closely watched personal income and expenditures data for May comes out Friday. Economists expect a rise in income and spending. The core PCE, which is the Fed’s preferred inflation measure, is seen increasing 4.7% from May 2022, matching April’s gain.

—Nicholas Jasinski and Janet H. Cho

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Lucid
Takes Stake in
Aston Martin,
Announces Battery Deal

Lucid is taking a stake in luxury car marker Aston Martin that will also see the electric vehicle start-up supplying the storied British marque batteries and other technology. The pair have a common shareholder in Saudi Arabia’s Public Investment Fund.

• The deal, announced Monday, is significant for Lucid after its stock hit a record low last week, and key for Aston Martin, which will launch its first electric vehicles from 2025. In a joint statement the companies said the deal includes powertrain components for future electric models.

• Lucid will become a 3.7% shareholder in Aston Martin, subject to shareholder approval, and receive payment of 104 million pounds ($132 million), which potentially could amount to $232 million. This is small compared with the fresh $3 billion in recent Lucid stock sales, but will still be welcome given the costs involved in an EV start-up.

• Aston Martin, which is a relatively small car maker, had a deal to buy batteries from bigger partner Mercedes but will now acquire them from Lucid. Aston will continue its relationship with Mercedes, providing engines and other equipment, however the German car giant will no longer raise its 9% stake in Aston, according to a separate statement Monday.

What’s Next: The deal is significant for Lucid because it shows its tech has a value beyond the vehicles on its own production line. This could also be the start of an interesting trans-Atlantic partnership that combines the skills of a historic British brand with a cutting-edge U.S. EV start-up.

—Rupert Steiner

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Supreme Court Decisions Awaited in Admissions, Student Debt Cases

The Supreme Court is expected to decide on several high-profile cases with just days to the end of its current session this week, including affirmative action in college admissions, President Joe Biden’s student debt forgiveness plan, and the intersection of gay rights and free speech. It often leaves its biggest decisions for the end.

• In two parallel cases concerning admissions at Harvard University and the University of North Carolina, the court is widely expected to roll back affirmative action. That could eventually have a domino effect on corporate hiring and diversity efforts.

• Progressive lawmakers vowed to ensure student debt cancellation goes through in one form or another regardless of the Supreme Court’s decision. The Biden administration’s plan would cancel up to $20,000 in federal student loans. Republican-led states say the White House overstepped the separation of powers.

• Colorado web-design company 303 Creative wants free speech protection to refuse working on same-sex weddings. The case sets up a clash between two lines of recent Supreme Court precedent: one extending legal equality to LGBT individuals, the other elevating rights of conscience and expression, The Wall Street Journal reported.

• Another pending decision focuses on a GOP-friendly North Carolina congressional map that the Republican state legislature adopted, testing state authority over federal elections. In early June, the Justices ordered Alabama state officials to redraw the state’s congressional map to allow an additional majority Black district.

What’s Next: The Education Department has warned borrowers that because Congress won’t allow any more extensions on student-loan repayments, student loan interest will resume starting Sept. 1, and repayments will resume in October. The typical monthly bill is about $350.

—Janet H. Cho

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MarketWatch Wants to Hear From You

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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Rupert Steiner