Good day. European Central Bank President Christine Lagarde warned yesterday that Russia’s invasion of Ukraine could significantly hold back economic growth by dragging on trade and sentiment, while also pushing inflation considerably higher in the near term. She was speaking after the ECB, in a surprise decision, said it would phase out its large bond-buying program by September, taking a key step toward raising interest rates later in the year. However, that shouldn't be wholly unexpected because, as the WSJ's Greg Ip points out in his Capital Account column, war has been a reliable precursor to inflation and history may be about to repeat itself. Meanwhile, European Union leaders pledged this morning to further increase the economic pressure on Russia and Belarus following the invasion of Ukraine, and the Bank for International Settlements, known as the central bank for central banks, suspended Russia from using its services, saying it "will not be an avenue for sanctions to be circumvented.”

 Now on to today’s news and analysis.

The European Central Bank said it would phase out its large bond-buying program sooner than expected and paved the way for interest-rate increases later this year, roiling financial markets and underscoring the challenge that Europe faces in managing the potential stagflationary shock caused by Russia’s war in Ukraine.

The ECB’s decision weighed on the euro and drove up the borrowing costs of heavily indebted European governments such as Italy’s as investors anticipated less support from an enormous buyer of sovereign debt.

Research analysts at the Federal Reserve Bank of Cleveland said in a report that closely watched data purporting to track public inflation expectations is most likely telling an accurate story.

The analysts reached their conclusion in a novel way. They asked respondents in surveys what they believed their respective incomes would need to be to maintain their lifestyles and buy the same set of goods a year in the future. Read more.

• As Gasoline Prices Surge, $5 Is a Bargain Around San Francisco
• U.S. Banned Russian Oil. Will Suspension of Gasoline Tax Be Next?
   

• The New Starting Salary for Some Graduates Is $100,000

• Russian Airstrikes Intensify in Western Ukraine
• Aeroflot’s Decades-Long Turnaround Faces Undoing
• Tanker Owners Are Steering Clear of Russian Oil Cargo
• For the latest updates on Russia and Ukraine click here.

10 a.m.: University of Michigan releases preliminary consumer sentiment survey for March

Time N/A: U.S. Federal Reserve begins two-day policy meeting
 

Underlying inflation is high, but it isn’t as bad as more closely watched measures like the consumer-price index suggest, according to a report released on Thursday by the Federal Reserve Bank of Cleveland. The report said the Cleveland Fed’s Median CPI, which strips out the biggest moving components in the CPI on the upside and downside, rose by 4.6% in February from a year earlier, compared with a 7.9% rise in the overall CPI and a 6.4% increase in core CPI over the same period. While the Median CPI’s increase is below such conventional measures, it is high relative to the Fed’s 2% inflation target and very much buttresses the case for an interest rate increase next week by the central bank. At the same time, the Median CPI’s trend has clearly been on the upswing: In September, the index rose by an annualized 2.7%.

—Michael S. Derby

• The U.S. government ran a $217 billion budget deficit in February, a narrowing of the shortfall from the same month last year, as spending on pandemic aid slowed and a stronger economy generated additional tax revenue.
• Labor shortages aren’t purely due to absenteeism related to the coronavirus, according to Capital Economics. It said around 80% of the shortfall can be explained by factors that will prove more persistent, such as a fall in migration, adding that shortages are most acute and likely to persist the longest in the U.S. and U.K., compounding reasons to expect a relatively sharp rise in interest rates there. (Dow Jones Newswires)
• Three out of five U.S. homes that went under contract during the month ended Sunday found a buyer within two weeks, according to Redfin, an all-time high that comes at the same time that supply shrank to a low. (DJN)
• Sales at Mexican retail association Antad rose 11.7% in February as comparisons continued to benefit from weakness a year earlier when some Covid-related restrictions were in place at malls and other public venues. Total sales including stores opened in the preceding 12 months rose 13.9% from February 2021. (DJN)
• Retail sales in Brazil increased by a seasonally adjusted 0.8% in January from December and fell 1.9% from a year earlier, the Brazilian Institute of Geography and Statistics said. In December, sales fell a revised 1.9% on month, after IBGE originally reported a decline of 0.1%, and declined 2.9% from a year earlier. (DJN)
• New bank loans in China plunged in February due to seasonal factors and weak demand, slowing significantly from record-high levels in January. New yuan loans issued by Chinese banks stood at 1.23 trillion yuan ($194.6 billion) last month, down significantly from CNY3.98 trillion in January, according to data released Friday by the People's Bank of China. (DJN)
• Beijing is unlikely to release its grip on its zero-Covid strategy before March 2023, something that will make it harder to achieve its economic growth target of around 5.5% this year, Nomura says. (DJN)
• Prime Minister Narendra Modi led his party to a resounding electoral victory in India's most populous state, showing his enduring popularity despite protests over a proposed farming overhaul and an economy that has struggled to recover from the pandemic. (DJN)
• Sweden will increase military spending to 2% of gross domestic product to boost its defense capabilities as the security situation in Europe worsens after Russia’s invasion of Ukraine, Prime Minister Magdalena Andersson said Thursday. (DJN)

This newsletter is compiled by Perry Cleveland-Peck in Barcelona and James Christie in San Francisco.

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James Christie, Jon Hilsenrath, Michael S. Derby, Nell Henderson, Nick Timiraos, Paul Hannon, Kim Mackrael, Tom Fairless, Megumi Fujikawa, Perry Cleveland-Peck, Michael Maloney, Paul Kiernan, James Glynn

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