The economic backdrop to this unjust war isn't just limited to energy supplies and few short term options for alleviating the tightness in that critical market.

It is also, of course, taking place in the context of high inflation.

And also, just as important as the underlying condition, central banks are taking steps to combat inflation while hopefully protecting economic growth at the same time.

This is the key for the Federal Reserve: Can they control the inflation issue without harming the robust economic recovery here in the US?

This isn't "just" about stocks either. Many Americans are experiencing large increases in wages at present. That is a bit far from our remit here but we strongly hope that this continues. Wages up, inflation down would be very welcome news for many people and a godsend to poorer Americans who are trapped by rising prices on one side and an eroding standard of living on the other.

The stakes are not small.

We have preached twice already this year that watching financial conditions will be critical to watch in the months ahead as the Federal Reserve tries to achieve lower inflation without significantly damaging the economy.

Here is an update of the Goldman Sachs Financial Conditions index that we have referenced frequently in the past:

It continues to rise quickly and so financial conditions are tightening across the US economy. The best way to think about this is that it is making it harder for investors and borrowers to finance their spending and therefore for the economy to grow.

Now, as any observer might point out, the level of US financial conditions is still very low. Almost still historically low. This is undoubtedly true!

But it has also risen very quickly. It is less the level and more the rate of change that may be proving difficult for financial markets and especially certain sectors of stocks to tolerate.

This is especially the case for unprofitable companies such as many technology firms that must, of course, borrow in order to survive, let alone grow.

And now we must add the war in Ukraine to this already complex and challenging equation.

Overall, the conflict raises the challenge of managing high inflation for the US Federal Reserve.

Why?

Because it raises the probability of the high inflation/low growth stagnation scenario we have discussed before. A serious war in Europe could hurt European growth while continuing to keep energy and other commodity prices very elevated.

Thus, thanks to the impact of the war & sanctions combined, inflation could continue to rise even as global economic growth slows.

• The positive is that declining global asset prices and tightening financial conditions will hopefully remove some of the excess in markets and the economy.

• The negative is Russia and Ukraine are both critical for numerous commodities. Elevated commodities could keep inflation high and trap the Federal Reserve.

That is likely why markets rallied so hard on Thursday and Friday when it was clear that there would not be strict sanctions - yet - on Russian energy companies or exports.

Why?

Because it suggests that energy prices will not go dramatically higher thanks to the forced removal of Russian supply.

Therefore, the question of that supply and the overall direction of energy prices will be key to watch in the weeks and months ahead as a very dynamic situation continues to unfold.

For now, the Fed will be watching the financial conditions index but also global commodity prices. Two of our great themes are combining into something larger still. They will be nervous about both of them - in terms of the levels and the rate of change.

If they are forced to raise interest rates into a slowing economy then the central banks could even tip the economy into a recession.

Ironically, of course, a recession would likely solve the inflation problem.....

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