One Year In: What Did Putin’s Gambit Do to Spreads, Uncertainty, and Activity?

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, 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.



16 thoughts on “One Year In: What Did Putin’s Gambit Do to Spreads, Uncertainty, and Activity?

  1. Moses Herzog

    I know at least one nation that’s probably grateful for Putin’s war:

    And I know of another country that has done nothing to punish India’s opportunism. Even though that nation said it would punish those who assist Russia in trade. Why would that nation give lip-service to that when they indeed have zero plans to punish nations which finance Russia’s war?? Just shut up when you know your words are empty.

    I also think if Iran wants to sell drones/weapons to Russia that Biden should clandestinely phone up Netanyahu and tell him “You want to do a large bombing raid on military targets/ drone manufacturers in Iran?? We won’t back you militarily for now, and you NEVER got this phone call from me, but go ahead and bomb the Em-Effers. You’ll hear no complaints from the US. State Dept.”

    1. Macroduck

      While on the topic of India, India appears to be increasingly worried about China, while trying to ease tensions with Pakistan. The decision to ease tensions during Pakistan’s economic distress, instead of taking advantage of that distress, is telling.

      New Indian troops for the border with China:

      Because India expects increased aggression from China:

      Which is why (aside from domestic politics) India is acquiring new missiles capable of hitting Chinese forces in occupied Tibet:

      Meanwhile there is speculation of a shift toward reproachment between Pakistan and India:

      If Modi doesn’t screw things up, India is likely to be an increasingly important part of the world economy. A giant on China’s border is inevitably a big player in 21st century geopolitics, no matter what Modi does.

      1. Moses Herzog

        Well, I’m not against India being a buttress against China in the region. But I wonder what Biden thinks China will be thinking, when China is giving strong consideration to selling weapons to Russia, while India funds Russia’s war and Biden does nothing about it. Because if I was a Beijing bureaucrat, I’d be sitting there thinking to myself “America doesn’t seem to care India helps Russia fund their invasion, why the hell don’t we help an ally and make a few dollars in the process?”

      2. Ivan

        We actually want someone to purchase Russian oil – but at a heavy discount. If the Russian production was taken off the market, we would have extremely severe consequences and the coalition supporting Ukraine would not be able to hold. Biden has done this exactly right. He got oil at $80 pb with discount on Russian oil of $20-30. At that price we have incentives to develop and use alternatives, yet not an oil shock to the economy. Russia’s government on the other hand has seen a very substantial loss of hydrocarbon income. It’s fine that India is harvesting the benefits of that oil discount.

        1. Moses Herzog

          I hope you are correct, but I respectfully disagree that India purchasing oil from Russia at ANY price is “fine” and I disagree that we “want” any country purchasing Russian oil. Those funds are used to purchase weapons and manpower to kill Ukrainians. I don’t know at what oil barrel “price point” the act of funding mass murder becomes “fine” or something “we want”.

          If Menzie or anyone with a Master’s degree or above in Economics. Econometrics, or some similar such wants to present the mathematics to me on how purchasing discounted oil from Russia helps Ukrainians, I’m more than happy to be educated. I think it’s a “tall order” but I’m very receptive to seeing the hard math on that one.

          1. Ivan

            Actually the argument is not economic – its political. So you don’t need a degree in Economics to understand it. You just have to be sober and a careful reader. And one out of two ain’t good enough.

  2. Macroduck

    Off topic, anti-trust policy –

    Early this month, the Department of Justice reversed a policy in place since 1996 allowing information sharing between healthcare firms:

    Biden’s administration is stepping up anti-trust enforcement, too.

    So, this guy has reshaped U.S. foreign policy, passed the first infrastructure spending package in decades – one which includes spending to limit greenhouse gas production – and is stepping up anti-trust enforcement. Sure hope he doesn’t run again – who knows what he might do.

    1. Macroduck

      A minor detail – the “information sharing” which was allowed starting in 1996 included mergers. It was a pretty broad definition of “information”.

    2. JohnH

      Naked Capitalism has a nice write-up on this: “Reversing 30 Years of Damage from the Clintons, the DOJ Closes A Price-Fixing Loophole Wide Enough to Drive a Truck Through”

      I decided to stop voting for Democrats for president during Bubba’s first term. (I never vote for Republicans, either.) If a lot more Americans started voting for anyone but one of the two evils, one of the evils’ might eventually realize a golden opportunity to win by representing the interests of we, the people, instead of just ritually genuflecting to corporate interests.

      1. pgl

        The Naked Capitalism was an interesting contribution from you for a change. Of course, we did not need you ranting about who you voted for. After all Ross Perot is no fan of real competition.

        Now to the substance of the Naked Capitalism. Most people paying attention to the health care sector knows about massive anti-competitive behavior. But a landlord cartel?! As NYC resident Jimmy McMillan has often declared “the rent is too damn high”!

    3. pgl

      An interesting note – one that even Jonny boy was able to contribute to. Yea that Naked Capitalism link is a must read.

      “Biden’s administration is stepping up anti-trust enforcement, too.”

      Exactly but Jonny boy says he will never vote for a Democrat. I guess if Nikki Haley runs as an independent – he’s vote for this racist two faced pro-rich princess.

    4. pgl

      I eat a lot of chicken so this is good news for me:

      The Department of Justice filed a civil antitrust lawsuit in the U.S. District Court for the District of Maryland against a data consulting firm and its president, as well as three poultry processors, to end a long-running conspiracy to exchange information about wages and benefits for poultry processing plant workers and collaborate with their competitors on compensation decisions in violation of the Sherman Act. The lawsuit also alleges that two of the poultry processors violated the Packers and Stockyards Act by engaging in deceptive practices associated with the “tournament system,” which pits chicken growers against each other to determine their compensation. At the same time, the department filed proposed consent decrees with Defendants Webber, Meng, Sahl and Company (WMS) and its President, G. Jonathan Meng, as well as Cargill Inc., Cargill Meat Solutions Corporation, Sanderson Farms Inc. and Wayne Farms LLC. “Through a brazen scheme to exchange wage and benefit information, these poultry processors stifled competition and harmed a generation of plant workers who face demanding and sometimes dangerous conditions to earn a living,” said Principal Deputy Assistant Attorney General Doha Mekki of the Justice Department’s Antitrust Division. “Today’s action puts companies and individuals on notice: the Antitrust Division will use all of its available legal authorities to address anticompetitive conduct that harms consumers, workers, farmers and other American producers.”

      Yea – this is a swipe against monopsony power rather than monopoly power which will increase wages in this sector. But the way this works, the higher compensation for workers will increase more hiring not less. Which should increase poultry supply meaning lower prices for me. Now the shareholders of Cargill might be upset that their market power is being challenged but the heck with them.

      1. JohnH

        The DOJ filing is a good first step, particularly after the monopoly coddling years of Clinton and then Obama, who gave banksters a get out of jail free card.

        The real proof of Biden’s apparent good intentions will be results, i.e. convictions. until then it’s just smoke and mirrors, posturing, managing optics. Even Bush was willing to send his friend Ken Lay to jail.. Democrats have nothing comparable to show. What we need is an anti-corruption operation like Brazil’s Car Wash, which took down hundreds of politicians and businessmen.

        But for a pro-corporate Democratic partisan hack like pgl, the appropriate political posture is all that matters…unless the malefactor is a Republican.

        Now Mt. Trashmore will erupt, spewing garbage and BS…for which pgl is notorious.

  3. pgl

    Check out this move from the lawyers of Faux News:

    Fox News on Thursday told a judge that Dominion Voting Systems has no evidence to support its “staggering” $1.6 billion damages claim in a defamation lawsuit over the network’s coverage of election-rigging conspiracy theories. Fox made the argument in a counterclaim filed in Delaware Superior Court, the latest development in a legal battle over Fox’s coverage of the 2020 U.S. presidential election. Fox alleged in its filing that Dominion’s damages claim has “no connection” to its value “or any supposed injury it suffered” after the network aired debunked claims that Dominion voting machines were used to rig the election against Republican Donald Trump and in favor of his Democratic rival Joe Biden.

    Par for the course for any defense attorney is a civil lawsuit. When the claim that the allegations of damage are unfounded – next find some hack to claim that damages are not worth much. What I would find interesting is what happens when this lawsuit tanks the share price of Fox Corporation. A shareholder lawsuit would be so much fun!

  4. Anonymous

    How do you explain the high inflation (actual, not anticipated) during 2021 (before the invasion)?

    I would not also that at the time (during 2021), you kept saying in the spring that it was just a blip and would subside.

    Yes, the war didn’t help. But we’ve had high commodity prices before sans general inflation (think 2008). And had a lot of military spend in Iraq in the early 2000s sans large inflation.

    It seems like you are trying to make an excuse for the Biden administration. If this were Scott Walker as president, we’d have a different explanation 😉

    1. Ivan

      You are having a hard time understanding the concept of two consecutive inflationary events – one (Covid) predictable the other (war in Ukraine) not – being additive and making specific timing more difficult to predict? I think you need to go back and retake middle school before you wander out into the adult world. The fact that those two events were short-lived drivers of inflation and they are waning is exactly what Menzie and any other competent economist have predicted. The fact that they could not predict the Russian invasion doesn’t make their analysis wrong.

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