Research Update: April 2022


Will McIntosh, Ph.D
Global Head of Research

Jay Johnston
Senior Associate, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Director, Global Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

April 2022

The financial, political, and social realms are becoming increasingly interconnected and faster moving. Based on current events, we would like to provide our house view as it relates to the following economic and geopolitical topics:

The Ukraine War and Global Materials Shortages

The war between Russia and Ukraine is causing a slew of far-reaching effects across the globe. While ever-evolving, impacts will continue to be felt in the food and materials supply chains as well as the energy complex in the coming months. Even prior to the recent geopolitical instability, multi-decade high price increases had been occurring in these key areas.

Looking at wheat as a sign of things to come, prices (Exhibit 1) had been quietly building momentum since late 2016, but the recent skyrocket was in direct response to the Russia’s invasion of Ukraine in late February 2022. To contextualize the situation, the world’s largest wheat exporter invaded the world’s fourth largest wheat exporter.[1] Wheat prices were trading under $780 per a 5,000 bushels futures contract in the week leading up to the invasion, before rising to an all-time high price of $1,425 per futures contract.  Since then prices have retreated but remain significantly elevated with respect to pre-invasion levels.

EXHIBIT 1: Wheat Prices Have Never Been Higher (Generic 1st Contract Futures Prices – 2000 to 2022)

Source: Bloomberg LP

This is important because large spikes in wheat prices have served as catalysts for geopolitical unrest before. Case in point, the 2010 spike in wheat prices (Exhibit 1) was a result of dry weather leading Putin to institute a temporary export limit in preparation for a poor harvest, ultimately contributing to the Arab Spring later that year and the Syrian Civil War in early 2011.[2] Geopolitical experts are equivocating that current forces may lead to even more dire fallout.  The farther Russia is able to push into Ukraine and associated rural areas, the deeper the damage from a year of skipped planting. By some estimates, Ukraine’s wheat harvest could be cut in half.[3] Additionally, Ukraine is a key exporter of corn and sunflower oil, both of which are suffering from similar dynamics as wheat.  Even the harvested crops must endure logistical bottlenecks before product is able to reach important supply routes and end markets.

Similarly, the world is suffering from a scarcity of fertilizer due to a temporary export ban by China. Previously the world’s largest producer of phosphate, the ban was a result of an outbreak of African Swine Flu causing China to need to guarantee its’ food supply through rice cultivation.[4]  The export ban is expected to last into 2023. This is occurring during a period of historically high nitrogen-based fertilizer prices that is further exacerbated by natural gas supply tightness in response to declining North American and Russian production. The situation is made worse by that fact that Russia is not only the largest exporter of potash fertilizer but also the global leader in supplying finished fertilizer product.  To note, new production capacity in these materials takes considerable runway, between three to five years for expansions and a decade before greenfield development projects reach production.  Fertilizer shortages will lead to lower crop yields, with the potential to reverberate for years to come.

As global trade relations become more precarious and difficult to manage, shortages in basic materials put the world’s dependence on Russia and China on centerstage. Elevated global crop and fertilizer prices are leading to food security concerns in the Middle East and Africa in addition to reducing income for rural farmers. Relating to commercial real estate, a reversal of globalization as a result of the Russian invasion should be a net positive for industrial demand in the U.S. and Europe since it could accelerate the nearshoring of manufacturing and add focus to supply chain redundancy.

U.S. Interest Rate Environment

The interest rate environment is also rapidly evolving in relation to high inflation, looming rate hikes, and receding federal monetary support. With the Federal Reserve (Fed) behind the curve after initially dismissing inflation as “transitory” and shifting to a flexible average inflation target, the Fed finally looks positioned to reign in the surging prices with a strong series of rate hikes in 2022 and beyond. Over the past six months, the 10-Year Treasury rate has increased by roughly 120 basis points (bps) to 2.78% as of April 14, 2022 and fixed-term mortgage rates and corporate bond yields have increased by approximately 150 bps. The recent rise in mortgage rates is the largest increase in such a short period of time since the 1980s.[5]

10 Year vs. 2 Year Treasury Yield Curve Inversion

Much has been made about the recent yield curve inversion, as measured by the spread of the 10 Year U.S. Treasury Rate vs. the corresponding 2 Year Rate.  Using constant maturity Treasury figures, the 10 vs. 2 Year curve inverted by 5 bps on April 1st. The last time the 10 Year-2 Year yield curve inverted was August 27, 2019, when it hit -4 bps.  Subsequently, a recession hit in February of 2020.

An inverted yield curve is often taken as a leading indicator of a recession within a year to 18 months. The shape of the yield curve has a strong track record of predicting every recession post-World War II, with the one exception being a false positive in 1967. That said, strong theoretical underpinning to explain why it’s proved to such a reliable indicator remains unclear.[6] To note, historically the 10 Year-3 Month spread has done a better job in signaling economic downturns. Importantly, the 10 Year-3 Month spread is still +195 basis points as of April 14, 2022 and above it’s average of +173 bps over the last 40 years.[7] Based on aggressive Federal Reserve rate hikes this year, the 10 Year-3 Month spread is likely to narrow but unlikely to invert for some time due to quantitative tapering’s support of longer yields. [8] Other leading indicators do not share the yield curve’s gloomy outlook. The ISM manufacturing index is still well in expansionary territory at 57.1 as of last month, more consistent with continued economic growth.

Interest Rate Forecast Update

The FOMC released their March 15-16 meeting minutes last week, revealing that officials envision a series of 50 bps rate hikes to quickly return policy to a more neutral level.  The Fed is expected to hike interest rates six times in 2022. The Fed is then likely to maintain a healthy series of four additional 25 bps hikes in 2023. As such, interest rate expectations have risen and markets now anticipate the Federal Reserve will hike the Federal Fund Rate to 2.00% by the end of 2022 and between 2.50-3.00% by the end of 2023 (Exhibit 2). [9]

EXHIBIT 2: Federal Fund Rate Projections

Source: Bloomberg LP, USAA Real Estate

Given the Fed’s hawkish pivot, it also intends to materially withdraw monetary support through the run down of its’ balance sheet. The recent meeting minutes signaled it will allow $60 billion of Treasuries and up to $35 billion of MBS securities to mature each month to achieve a balance sheet reduction of its holdings, with quantitative tapering set to begin in May. Next year, the Fed is likely to start outright MBS sales to further shrink its balance sheet from over $8 trillion currently to roughly $5 trillion by late 2024.

The Federal Reserve will need to be cautious or it runs the risk of tightening to a point that succeeds in alleviating inflationary pressures but fails by causing a slow growth environment. It is our view that the level of interest rate hikes and quantitative tapering currently expected by the market may not actually materialize if a marked economic slowdown begins to occur. So far, cap rates have been able to absorb increasing interest rates and reduced market liquidity with little impact to pricing, but further cap rate compression would be difficult to achieve if liquidity and lending markets tighten further. While cap rate expansion may not be showing up in the data just yet, we are beginning to see anecdotal evidence of its’ occurrence in select assets.

Persistent, Elevated U.S. Inflation

U.S. CPI rose to 8.5% in March, driving headline inflation to a new 40-year high. Over the last 12 months, gasoline and food prices increased 48.0% and 8.8%, respectively. While March may prove to be peak headline inflation, there is a strong likelihood that it will remain elevated and persistent resulting from rising services-based demand coupled with increased geopolitical turmoil and lingering labor shortages.


Goods-linked inflation pressures are finally beginning to subside, particularly for the most sought after items during the pandemic like used automobiles.  The easing port congestion and declining supplier delivery times should contribute to lower inflation for goods and products. Used automobile prices have now fallen for two straight months on the heels of improvement in the supply of new vehicles leading to an increase in the number of trade-ins on the used market.[10] That said, China is currently in the midst of the largest COVID outbreak since the early days of the pandemic, causing broad lockdowns from its’ zero-tolerance approach to the virus and increasing the future risk of additional supply chain disruptions.[11]  Elsewhere, a recent trucking clampdown at the Texas-Mexico border could also lead to food shortages and price volatility.[12]


Nearly a third of Services inflation is due to shelter, comprised of rents for single-family residential dwellings and for-rent multifamily.  Importantly, the BLS method of measuring rents means that last year’s spike in asking rents will be gradually reflected in CPI rents.[13]  To note, March CPI’s rent costs were the highest since 2005 and a further acceleration in rents should keep inflation elevated. Given that the U.S. is still woefully undersupplied in single-family homes, this begs the question of how long inflation can remain elevated.[14]


As we alluded to above, energy supply shortages are emerging on a global scale.  Gasoline prices surged over 30% in response to Russia’s invasion of Ukraine and natural gas prices remain nearly 50% higher. Since the start of the Shale Revolution, global rig count has never been lower on an absolute basis.  Since the start of COVID, the global count has been reduced by roughly 25%, resulting in 500 less rigs.[15]  Concurrently, demand has roared back post-COVID.  According to the International Energy Agency, global consumption is now expected to average 99.4 million barrels per day, up by nearly 2 million barrels per day from 2021.[16] Despite this fact, energy companies have materially reduced capital expenditures (Exhibit 3) as a percentage of operating cash flow, raising alarms around the level of investment across the upstream segment of the energy industry both at home and abroad, limiting the prospects for near-term future production and introducing increased volatility across the energy complex.

EXHIBIT 3: S&P 500 Energy Index CapEx/CFO (Historical and Forecasted Annual Capital Spending)

Source: Bloomberg LP, USAA Real Estate

Inflation remains a concern in the U.S., with certain components easing while others may just be gaining traction. While inflation may have peaked this month, notwithstanding additional geopolitical and supply chain events, the risk is that prices may be stickier on the way down then they were on the way up, leading to a period of higher than average U.S. inflation in relation to a neutral 2% environment. Commercial real estate has historically served as an effective hedge, since rents can rise alongside inflation; however if inflation exceeds the growth in leases and market rents, it can negatively impact values.



These materials are for informational purposes only and should not be considered a recommendation to purchase any investment product.  Past performance is no guarantee of future results.  These materials represent the opinions and recommendations of the author(s) and are subject to change without notice. USAA Real Estate, its affiliates and personnel may provide market commentary or advice that differs from the recommendations contained herein. Certain information has been obtained from sources and third parties. USAA Real Estate does not guarantee the accuracy or completeness of these materials or accept liability for loss from their use. USAA Real Estate and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein.

This House View contains forward-looking statements which include statements, express or implied, regarding current expectations, estimates, projections, opinions and beliefs of USAA Real Estate.  Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors.  USAA Real Estate’s opinions may change and actual results may differ materially from the forward-looking statements.


[1] Zeihan on Geopolitics. The Return of the Third Horseman. Published April 1, 2022.

[2] Ibid.

[3] Bloomberg. Half of Harvests in Corp Giant Ukraine Could Be Wiped Out by Way. Published April 9, 2022.

[4] Ziehan on Geopolitics. The Return of the Third Horseman. Published April 1, 2022.

[5] Capital Economics. US Economics Weekly.  Long rates rising but still low, particularly in real terms. Published April 1, 2022.

[6] Capital Economics. US Economics Weekly. Published December 19, 2005.

[7] FRED Economic Data. 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity. Accessed on April 12, 2022.

[8] Capital Economics. US Economics Weekly.  Long rates rising but still low, particularly in real terms. Published April 1, 2022.

[9] Capital Economics. US Economic Outlook.  Economy will bend not break under higher rates. Published April 12, 2022.

[10] Bloomberg. U.S. Inflation May Peak in March, But It’s a Slow Go to Fed’s 2%. Published April 10, 2022.

[11] LA Times. China weighs an exit from its successful, but onerous, ‘zero-tolerance’ COVID policy. Published March 18, 2022.

[12] Bloomberg. Texas Ag Commissioner Blasts Governor’s Border Crackdown. Published April 12, 2022.

[13] Bloomberg. U.S. Inflation May Peak in March, But It’s a Slow Go to Fed’s 2%. Published April 10, 2022.

[14] Rosen Consulting Group. Housing is Critical Infrastructure. Published June 2021.

[15] Baker Hughes Total World Oil and Gas Rotary Rig Count.  Data as of April 14, 2022.

[16] International Energy Agency. Oil Market Report – April 2022.