Ukraine-Russia War: Grinding Away and US Double-Talk
The Ukraine-Russia Conflict held with grinding incremental territorial losses by Ukraine in the east. Russia pressed with its weight in numbers with casualties estimated at three times those suffered by Ukraine. Strategically, Ukraine continued to attack Russian oil refineries, fuel storage facilities and airfields, which affects the war at a strategic level. As an example, the Ryazan Refinery deep in Russia (over three hundred miles from the front lines and about one hundred miles from Moscow), was hit a second time. Currently per OilPrice.com, about 10% of Russian oil refining is offline. As the month ended, a US and NATO weaponry and ammunition influx began to turn the initiative back around to Ukraine with counterattacks, though limited progress would be expected.
Ukrainian exports of agricultural commodities wheat and corn were estimated to fall by nearly a quarter in the upcoming 2024/25 July-June season following a smaller harvest as a result of war, per the Ukrainian
first deputy agriculture minister, saying the export of wheat could fall to 14 million metric tons from 18 million tons in 2023/24. Ukraine’s grain exports in the 2023/24 July-June marketing season reached 40.7 million metric tons as of April 29 compared with 41.4 million a year earlier, agriculture ministry data showed, including 5.7 million tons exported so far in April. As the graphic right shows, the export levels have been relatively stable since the recovery at the beginning of the war.
On the other hand, US Ignored Violations of its Oil-Related Sanctions as the Associated Press reported that the US Treasury Department allowed Russian energy
transactions to continue through nonsanctioned non-US banks. Biden claimed the Russian energy carve-outs were a virtue because they would help to protect Americans from higher prices. “Our sanctions package we specifically designed to allow energy payments to continue,” he said as well as “Oil royalties & taxes generally account for about 40% of Russian federal government revenues” which indicated awareness that imposing such sanctions would be very effective in curtailing Russia war effort. Furthermore, a top Treasury official told an audience in Delhi in early April that the US didn’t expect India to stop importing Russian oil. India since granted marine insurance approval to four Russian firms, aiding Moscow’s efforts to avoid Western service providers. It also resumed imports carried on Sovcomflot ships, easing pressure on the need to smuggle oil. The increase can be seen in the graph left. China’s imports from Russia, including supplies via pipelines and sea-borne shipments, jumped 12.5% on the year to 2.55 million barrels per day (mbpd) in March. At least the US banned the import of Russian uranium copper, nickel and aluminum, and the US and UK banned delivery of Russian metal to the London Metals Exchange warehouses, distrupting pricing further.
Macro: Asia
China Economic Headlines Were Decent with fixed asset investment grew +4.5% y/y on manufacturing investment offsetting property investment, retail sales grew more slowly at +4.7% y/y and industrial production
was up more strongly at +6.1% y/y, while the unemployment rate increased to 5.3% as of February. New housing starts fell -27.8% y/y and completions fell -20.7%, both of which were slightly better than last month. Exports in US Dollar terms fell due to weakened exchange rates by -7.5% in March, with imports down -1.9% by value (see left). China’s exports to Russia slumped 16% in March with the first year-on-year decline since mid-2022, amid growing US threats of reprisal against Beijing if goods aid Moscow’s invasion of Ukraine. Trade between Russia and China hit a record $240 billion last year, driven by Chinese imports of Russian oil and exports of cars, industrial equipment and electronics. China-US trade in 2023 was about $580 billion in comparison, Russia ran a small trade surplus with China versus the US’ $117 billion deficit. Fitch Ratings revised its outlook on China’s debt to negative from stable while keeping the rating at A+, matching a similar action by Moody’s in December. Their thinking was that the government will dramatically expand its debt load in order to pull the economy out of a real estate-driven slowdown, though no announcement or evidence of this yet. We shall see.
Japan Forcefully Intervened In the Yen, selling about $61 billion in US dollar deposits to counter the ramping exchange rate which had moved from 150 per US dollar to 160, ending at 153 or so. While a weak Yen assists Japanese exports, the rapid move undermines the concept of stability of the Japanese government and central bank due to their expansionary fiscal and monetary policies. I suspect that this is just a temporary reprieve barring rate cuts by the US Federal Reserve given the interest rate, demographic and economic growth differentials between the two countries.
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. Note that should more MBS mature than the cap, the excess will be rolled into Treasuries, not mortgages. Example data that keeps the Fed “higher for longer” was the strong US employment cost index for the first quarter while other indicators were lower than a year ago but still high (e.g., job openings per unemployed, quits rate, Atlanta Fed’s wage statistics). Meanwhile, the WSJ reported that “Defaults are reaching historic levels in the office market, as a growing number of owners capitulate to persistently high interest rates and weak demand. More than $38 billion of U.S. office buildings are threatened by defaults, foreclosures or other forms of distress, according to data firm MSCI. That is the highest amount since the fourth quarter of 2012 in the aftermath of the 2008-2009 financial crisis.” An example of this stress came as US regulators seized Republic First Bancorp and agreed to sell it to Fulton Bank, with the FDIC contributing over $600 million to shore up deposits. This marked the first bank failure following the unexpected collapses of Silicon Valley Bank and Signature Bank in March 2023 and First Republic Bank in May (all of which were significantly larger). At the same time, the US federal government was poised to sell another $386 billion or so of bonds in May, the highest gross issuance ever.
Other US Economic Statistics Held Up so far with Q1 GDP growth coming in a lower-than-expected +1.6% and the Atlanta Fed estimated Q2 at +3.3% (both annualized). Housing costs are still in the stratosphere with
monthly payment needed to buy the median priced home up +95% over the last 4 years (from $1,480 to record $2,890). High mortgage rates were part of the problem (see left) as well as a dearth of supply apart from the southern and western US where multi-unit housing completions eclipsed those of 1990s. The interest rate on 48-month new car loans, moved up to 8.6% (highest since 2001), and credit card rates, which hit another record high of 21.6% in the first quarter, will likely also remain elevated. US inflation in March, stubbornly not falling. The core consumer price index, which excludes food and energy costs, increased +0.4% from February with the y/y rate unchanged at +3.8%, defying expectations for a downtick. Relative strength in rents was the most noticeable culprit given its size in the index. Services inflation accelerated largely due to categories tied to transportation like car insurance and repairs, as well as health care. Goods prices were a bright spot, resuming a downward trend that helped drive disinflation in the second half of 2023. Lower than expected job growth for April (+175,000 versus +240,000 estimated), caused the unemployment rate to tick up to 3.9%. Average hourly earnings also slipped fractionally to +0.2% month-on-month. At least there was progress on resuming shipping out of Baltimore with the seven trapped ships able to leave through a temporary channel. Ships have begun to enter as well, as American Sugar Refining said a full-size vessel delivered raw sugar from Florida to its Baltimore refinery.
Macro: Europe
European Inflation Expected Flat at +2.4% over the last twelve months ending April with core inflation a tick lower (from +2.9% to +2.8%) as energy prices slipped lower. German inflation rose slightly more than
forecast in April on the back of strong food and energy prices in Europe’s largest economy. Financial markets still expected lower inflation and GDP growth to push the ECB to cut interest rates before the US Federal Reserve but reduced their expectations to -0.7% versus the Fed’s -0.5% cut. The ECB held rates steady in April at 4%.
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource