Bluntly put, term spreads moved toward inversion, and inflation expectations adjusted for premia increased. VIX has been elevated since February 2022, and GeoPolitical Risk rose in the period right after the invasion. Growth, which had been accelerating according to weekly indicators, then decelerated. In other words, “Thanks, Putin”.
Figure 1: Top panel: 10 year – 3 month Treasury spread (blue), 10 year – 2 year spread (red), 10 year – Fed funds spread (green), all in %. Bottom panel: 5 year Treasury – TIPS spread (dark blue), and 5 year expected inflation (pink), both in %. Source: Treasury via FRED, and KWW following D’amico, Kim and Wei (DKW) accessed 2/18,
Notice that while Treasury-TIPS spread widens immediately and then drops in the wake of the invasion, inflation expectations measured after accounting for risk and term premia have risen pretty continuously since the invasion.
Figure 2: VIX (blue, left scale), and Economic Policy Uncertainty index, centered 7 day moving average (black, right scale), Geopolitical Risk index, centered 7 day moving average (red, right scale). Source: CBOE via FRED, policyuncertainty.com via FRED, Caldara/Iacoviello, and author’s calculations.
The VIX has been elevated — as has the Geopolitical Risk index — since the invasion.
Given these observations, it’s not mysterious that high frequency indicators of economic activity resumed a decline with the invasion.
Figure 3: Lewis-Mertens-Stock Weekly Economic Index (blue), Baumeister-Leiva-Leon-Sims Weekly Economic Conditions Index for US plus 2% trend (green). Source: NY Fed via FRED, WECI, and author’s calculations.
