Global Economic Review: May 2024

Ukraine-Russia War: Russian Problems & Reactions


The Ukraine-Russia Conflict continued with grinding incremental territorial losses by Ukraine in the east.  However, in the North, Ukraine seized the initiative both tactically and strategically.  Territorially, Ukraine had not recaptured yet all the small Russian gains there but gained on a number of fronts.  First of all, NATO countries (even hand-wringing Germany) allowed Ukraine to hit Russian lands with NATO-supplied weapons, allowing Ukraine to break up staging and supply areas inside Russia with ATACMS and other missiles, allowing for successful counterattacks in May and early June.  Just as important, the Russian causality count jumped by between 35,000 and 40,000 killed and wounded soldiers last month, depending on the estimate.  The British Defense Ministry said that Moscow had likely suffered more than 500,000 casualties since early 2022, with average daily casualties over 1,200—the highest of the war so far.  Some experts estimated that the casualty rate was eight-to-one in Ukraine’s favor, more than offsetting the population imbalance between the two countries.  While a gruesome measure, such numbers are needed to blunt the Russian assault.  Ukraine continued to attack Russian oil refineries, fuel storage facilities and airfields, which affected the war at a strategic level.  The damage included the destruction of one of Russia’s most advanced fighter-bombers (a Su-57), of which they have fewer than ten.  However, in addition, Ukraine damaged many radar facilities, both tactile mobile sites as well as strategic nuclear ones.  It would be ironic that Putin who regularly threatens nuclear red lines over Ukraine became more vulnerable to nuclear strikes.

Ukrainian exports of agricultural commodities reached 46.4 metric million tons by May 29, up from 44.9 million tons exported as of May 29, 2023.  However, Ukrainian grain traders union UGA revised down its forecast for Ukraine’s 2024 combined grain and oilseed harvest to 74.6 million metric tons from the previous outlook of 76.1 million tons.  Likewise, Russia’s Sovecon agricultural consultancy reduced its forecast for the country’s wheat crop this year to 80.7 million metric tons from its previous forecast of 82.1 million, the latest of weather-related downgrades.

To be clear Russia Does Not Stand Still as Putin replaced his widely-seen-as-corrupt defense minister with a reputedly more competent administrator, one focused more on logistics than medal-gathering.  In addition, some intelligence sources noted that Russia is forming combat groups in Belarus based on tank movements in the Russian ally.  In response to Europe seizing Russian assets for use by Ukraine, Russia returned the stroke by grabbing €700 million of property and financial assets from UniCredit, Deutsche Bank and Commerzbank that were stranded in Russia.  Meanwhile, Russian saboteurs were arrested in Germany over a bombing plan and other plots were uncovered in Poland (over a dozen arrested), UK (where James Bond was reactivated), and Latvia.   Finally, India’s Reliance Industries, operator of the world’s biggest refining complex, signed a one-year deal with Russia’s Rosneft to buy at least 3 million barrels of oil a month in rubles – sidestepping financial sanctions.


Macro: Asia


China April Economic Headlines Were Mixed, favoring industry as fixed asset investment grew +4.2% y/y and industrial production accelerated up +6.7% y/y.  Retail sales stumbled, up +2.3% y/y although theInventory Absortion Rate unemployment rate reverted lower to 5.0%.  In China’s headline trade figures for May, exports rose more than expected once again, by +7.6% y/y in USD terms, accelerating from a +1.5% y/y rise in April.  Meanwhile, Chinese imports gained +1.8% y/y last month, missing market expectations and slowing down from an +8.4% y/y jump in the previous month.  Chinese property data for April remained weak with declines in year-to-date home sales by value falling -31.1% y/y.  Average prices in the secondary property market dropped -0.9% m/m in April, the sharpest sequential decline since September 2014.  To raise funds to support the property market, China issued half of a planned CNY 1 trillion ($140 billion) long-dated (including 20-, 30- and 50-year maturities) bond issuance, with the rest set for November.  Xi also announced his most forceful attempt yet to rescue the beleaguered Chinese property market, relaxing mortgage rules and urging local governments to buy unsold homes through government-backed firms to buy excess inventory from developers.  The new funds will be needed as both the large developers Country Garden and Evergrande were in the process of being dissolved, with billions of dollars in unsold properties and unpaid debts.  As the graph to the right indicated, it was estimated to take over four years for the market to absorb the floor space for sale – about 60 million apartments per Bloomberg.  With China’s declining population, these empty spaces will be put to the central government, presumably to rot.  Taking a page from Putin’s book China escalated its saber-rattling with two days of military exercises around Taiwan, with its military calling them “strong punishment” for the self-ruled island’s “separatist acts” (China does not like the new Taiwanese president).

Taiwan Stepped Up Its Rhetoric and money followed as its exports were rerouted from China to the United States, partially due to the shifting of computer chip production and related assembly.  New directMore Taiwanese Exports Taiwanese investment in China also fell dramatically, to just $3 billion last year from a peak of $14.6 billion in 2010, and the island’s firms invested record amounts elsewhere.  Biden’s tariff increases on a range of Chinese products, from computer chips to electric vehicles and port cranes, undoubtedly played its part.  Japan, the world’s fourth-biggest exporter, and South Korea, rank number five, both also saw a bigger share of exports heading to the US at the expense of China.  Will China invade this year or even at all?  I still think “no” because of the ongoing damage Russia is taking, the greater willingness that the US and allies will become directly involved (also seen in Ukraine) and the inherent difficulties in launching a seaborne invasion.  The retaliatory damage to Chinese ships and ports (let alone potential damage to the Three Gorges Dam that would affect the primary cities of Wuhan and Shanghai) would likely cripple the Chinese, as well as world, economy.  A massive, massive risk.


Macro:  US


Federal Reserve Chair Powell was on balance dovish at the April 30th-May 1st meeting where he took another rate hike off the table (“I think it’s unlikely that the next policy rate move will be a hike. To hike we’d need to see evidence policy is not sufficiently restrictive — that’s not what we see.”) and said that the Fed will lower the monthly cap on how much Treasuries it will allow to mature without being reinvested, to $25 billion from $60 billion, while keeping the cap for mortgage-backed securities (MBS) unchanged at $35 billion.  No hikes were expected at the June 11-12thThree Cores meeting as job growth surged in May and wages accelerated, advancing 272,000 payroll positions and climbing +0.4% from April, respectively.  Technically, unemployment increased slightly from 3.9% to 4.0% as more people returned to the workforce but not yet found work.  The US federal budget deficit widened in the six months through March as higher debt-servicing costs and increased spending continued.  The deficit for the first half of the 2024 fiscal year reached $1.07 trillion or 4% larger than the prior year, adjusted for calendar differences.  In combination with the supplemental spending for Israel/Gaza, Ukraine, migration and the Far East, seeing $2 trillion deficit for fiscal 2024 (which runs until September 30th) appeared likely.  This too limited the impact the Federal Reserve has on lowering rates, unless it reverses course and starts aggressively buying bonds.  Bloomberg and the market predicted two rate cuts in 2024 but election politics could easily upend that.  Inflation also remains stickier than what the Fed would like, with various measures showing lower but not low inflation (see graph right).  Note that the Fed considers core inflation the more appropriate trend inflation number as energy and food prices fluctuate dramatically. 

Housing Is Still Key as rents in most major US metropolitan areas have risen some 1.5 times faster than wages in the last four years, according to an analysis by Zillow Group.  Nationwide, rents climbed 30.4% while incomes expanded 20.2% per cent from 2019 to 2023.  Homeowners also saw higher ongoing expenses as the average annual outlay for owning and maintaining a typical single-family home—not including mortgage payments—totaled $18,118 in March.  That works out to $1,510 a month, roughly $300 moreAgregate Delinquency than four years earlier, as reported by Bloomberg.  With incomes not keeping up, the first signs of increased foreclosures were amongst those that purchased their homes in the past four years, which accounted for 35% of mortgage defaults in Houston so far this year, the highest level since 2010 (the tail end of the Great Financial Crisis).  Another sign of the economic crisis from fifteen year ago is that United Wholesale Mortgage, one of the largest US mortgage lenders, now offers a zero down-payment option for its most needy customers.  While delinquency rates are nowhere near the levels of back then (3% versus 12%), the trend deserves watching (see graph right).  Finally, how do you know that the bottom 50% are struggling?  Because low-end retailer Dollar Tree will close 1,000 of its 16,000 stores and the younger half of workers (18-39 years old) have auto loan delinquencies approaching the rates of the 2008-2010 timeframe.  New York Fed economists looked at delinquency rates stratified by borrowers’ credit utilization.  They found another striking trend:  borrowers who have “maxed out” their credit limits are going delinquent at a rate unseen in the last decade – again, typically younger and lower-income borrowers.  To reiterate, the US is not at crisis point but the trend is flashing a warning.


Macro:  Europe


European Central Bank Cut Interest Rates to 3.75% for the first time in almost five years in early June, but warned that future reductions would depend onFewer Subsidies price pressures easing further.  However, the annual inflation was 2.6% in May 2024, higher than April’s 2.4% rate.  Core inflation also ticked higher to 2.9% from 2.7%.  Lagarde has a lot of faith.  Eurozone unemployment dropped further in April, falling by -0.1% as a strong jobs market took the rate to its lowest level since the formation of the currency bloc in 1999.  The euro area’s seasonally-adjusted unemployment rate fell to 6.4%, with just under 11 million people unemployed.  Interestingly, EV sales have stayed effectively flat for the last five months as seen in the graph right.  Sales brought forward in August last year to take advantage of subsidies before they were removed evidently distorted these numbers.  High electricity costs may also be dissuading buyers.


All the best in your investing!

David Burkart, CFA

Coloma Capital Futures®, LLC
Special contributor to aiSource