Global Economic Review: December 2024

War: Ukraine-Russia

 

Ukraine’s Eastern Territory Still Being Nibbled Away but Russia’s losses piled higher, reaching over 48,000 killed and wounded in December alone, per the Ukrainian military.  November was the second largest at 45,000.  If close to correct, that would place Russian casualties (dead and wounded) at 790,000 for the war.  Strategically, Russia’s deadly aerial bomb attacks have declined more than 50% since Western allies permitted Kyiv to strike Russian territory with long-range missiles (ATACMS and Storm Shadows) as Russia’s fighter-bombers were forced to move to air bases further from the front lines, decreasing effective strike ranges and increasing fuel and maintenance requirements.Guided Bombs  Averages fell from over 100 bombs per day in early November to around 40 in December (red line is the moving average).  Ukraine continued to hammer Russian refineries in order to hamper fuel supplies, with about one-third damaged or destroyed.  In an unusual move, a top Russian general accused by Ukraine of being responsible for the use of chemical weapons against Ukrainian troops was assassinated in Moscow as a bomb detonated outside his apartment building as he exited.  Overall, nine Russian generals have been confirmed killed during the war with an additional four more claimed by Ukraine but not confirmed by Russia. 

Russian Gas Exports via Soviet-era pipelines running through Ukraine came to a halt on New Year’s Day, marking the end of decades of Moscow’s dominance over Europe’s energy markets.  The gas had kept flowing despite nearly three years of war, but stopped in the New Year after Ukraine refused to renew a transit agreement.  Gazprom sold about $6 billion worth of gas through Ukraine in 2024, Bloomberg calculations showed, or about 0.2-0.3% of Russian GDP.  Three Russian oil and cargo ships sank in December due to Russian Rouletteheavy storms in the Black Sea and another was confiscated by Finland for dragging its anchor in the Baltic Sea, severing one power and four telecom cables.  Finally, Russia faces increasing difficulty shipping commodities to China through its vast eastern rail network, as its Russian Railways JSC — the state-owned carrier — cut 30% from its investment program for 2025 amid soaring borrowing costs – the base interest rate hit 21% as official inflation was above 8% (see right).

 

Macro: Asia

 

China’s Exports Hit $312 Billion in November, with the value of shipments to the US at their highest level since September 2022 and exports to Southeast Asia surging to a record.  That strong performance and a drop in imports widened the overall trade surplus through the first 11 months of the year to almost $885 billion, higher than any full year before.  With the US, China’s exports are on track to exceed last year’s level, reaching $327 billion through November and such expected to grow further.  Chinese imports declined -3.9% y/y in November, compared to market estimates of a +0.3% gain and to a -2.3% y/y fall in the preceding month, adding to fears regarding weak domestic demand.  One can see this in the domestic statistics, as YTD fixed asset investment grew +3.3% y/y (vs. +3.4% as of October).  November monthly retail sales gained +3.0% y/y (vs. +4.8%), the weakest growth in retail activity since August.  Meanwhile, industrial production was up +5.4% y/y last month (vs. +5.3%), while the official unemployment rate remained at 5.0%.  Real estate investment fell -10.4% y/y in the first eleven months of the year and inflation fell to +0.1% y/y – a level that consumers are not in a hurry to buy products as they believe the prices will remain stable.

China Set GDP Growth Goal of +5% for 2025, andChinas Property Collapse announced a record stimulus package of 3 trillion yuan ($411 billion) of special treasury bonds gains to push the broad deficit to close to 10% of GDP (2020 COVID levels).  However, with much of the spending on real estate refinancing to bail out highly indebted municipal and provincial governments (see the graphic on the falling income from land sales, a major revenue source for local governments), the net economic gains will be modest.  Finally, the economic environment has become so hostile that General Motors will take a $5 billion charge against its China businesses, including closing factories.  With the expansion of BYD, Nio, Geely and other Chinese automobile manufacturers, GM saw its Chinese business decline from 14% to 6% market share over the last six years (a decrease of about 3.7 million to 2.0 million vehicles sold).

 

Macro:  US

 

The Federal Reserve Cut -0.25% as expected at their December meeting with This Chart Says Pausea break expected in January.  The “dot plot” review of interest rate expectations shifted to only two cuts in 2025 from four, disappointing markets.  The Fed’s inflation expectations were higher and unemployment forecasts leaned lower, supporting the less dovish shift.  The closely watched inflation measure, the core PCE, has leveled off well above the Fed’s 2% target (see right), reaching +2.8% in October (highest since April) and is expected to exceed +3% by the end of the year.  New orders for US-manufactured capital goods surged in November amid strong demand for machinery.  Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rebounded +0.7% after dipping -0.1% in October.  The stronger-than-expected economy was seenContract rate on 30 year fixed mortgage in Q3 GDP, which was revised higher from +3.0% annualized to +3.1%, higher than expectations of a lower +2.8%, buoyed by an upward revision in real consumer spending of +3.7%.  December payrolls gained +256,000, beating estimates for +155,000 with only minor declines in previous month revisions.  The unemployment rate fell just below 4.1% from 4.2%.  Inflation expectations jumped in the median 5-10 year range to 3.3% from the prior (and expected) 3.0%.  In the Midwest, a dozen large eggs cost an average of $5.67 in mid-December, topping the previous all-time high of $5.46 set in December 2022.

US Consumers Continued to Suffer as mortgage rates followed bond yields higher, to just shy of 7% per Bloomberg (see left).  Outstanding US consumer debt actually fell in November by the most in over a year as credit card balances plunged. Total credit dropped by $7.5 billion, according to the Federal Reserve with credit card and other revolving debt decreasing by -$13.7 billion.  While this may alleviate the interest burden on the American public, these balances likely will rebound with Christmas spending.  Related interest rates would also not likely decline any time soon either.

 

Macro:  Europe

 

Eurozone Inflation Rose to +2.4% in December, defying the need for rate cuts for the ECB, which is expected to slow their pace after the expected cut at the December 12th meeting.  The ECB cut its 2024 Eurozone GDP forecast to +0.7% from a prior forecast of +0.8%.  European car sales sank in November as the region’s biggest automakers grapple with a slowdown in demand that’s triggered an industry crisis.  New-car registrations declined -2% from a year earlier to 1.06 million units, led by sharp falls in France and Italy.  Auto industry job losses reached 30,000 in 2024, double the 15,000 in 2023, with more expected.  Forvia, a maker of dashboards, expects to cut 10,000 over the next four years from their 75,000 workforce while Michelin said that it would close two French tire factories.  Germany’s Gerhardi Kunststofftechnik, a 226-year-old plastics manufacturer, filed for bankruptcy due to the European auto slump.  German exports rose +2.1% in November, rebounding after a fall of -2.8% in October.  However, November’s export level was still down -3.5% from a year ago.

 

 

All the best in your investing!

David Burkart, CFA

Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource