Ukraine-Russia War: Russian Problems & Reactions
The Ukraine-Russia Conflict continued with grinding incremental territorial losses by Ukraine in the east and gains in the north. The Russian causality (dead and wounded estimates) count continued 
its higher tempo of over 30,000 in July per British Defense Intelligence. Russia’s casualty rate was projected to continue to average above 1,000 a day throughout August 2024 as Russia continues offensive operations on a wide front from Kharkiv in the north to Robotyne in the south of Ukraine. In a grim image, the BBC calculated that prisoners that joined Russia’s “private” military Wagner Group survived longer than those that served under the Russia Defense Ministry – though the additional life expectancy was only about one month so a raw deal regardless. Ukraine continued to play the strategic game, attacking Russian oil refineries, fuel storage facilities, airfields and radar facilities as F-16s from the US and NATO arrived in early August. While not a game-changer by themselves, decent fighter jets would likely degrade Russian glide bomb capabilities which outmatch the equivalent in the Ukrainian arsenal.
Ukrainian Grain Traders Union cut Ukraine’s 2024 combined grain and oilseeds crop forecast by 2.8 million metric tons to 71.8 million tons due to a heatwave. The UGA said the harvest could include 23.4 million tons of corn, 19.8 million tons of wheat, 4.95 million tons of barley, 12.8 million tons of sunflower seed, 4.8 million tons of soybeans and 4.3 million tons of rapeseed. Ukraine’s grain exports were off to a good start in the 2024/25 July-June season as they reached over 3 million metric tons by July 26, up sharply from 1.9 million by the same date a season earlier. Ukraine was able to restructure $20 billion of its over $100 billion debt burden which will reduce required debt payments for the next three years by 90% in exchange for an increase in the overall debt. Russia maintained its official grain harvest forecast for this year at 132 million metric tons despite adverse weather conditions across many grain-producing regions, per Deputy Prime Minister Dmitry Patrushev. However, the key market of China may be now off-limits as several major Russian commodity exporters said that direct payments made in yuan were increasingly being frozen or delayed. Those Rubles no good anymore???
Macro: Asia
China’s June Trade Surplus Surged to $99bn, an all-time high, as exports rose to $308 billion, expanding for a third straight month while imports unexpectedly fell to $209 billion.
Per the graph right, US, non-China Asia and other countries (Russia, South America) had notable surplus increases. However, Q2 GDP missed expectations, coming in at +4.7% year-on-year. Fixed asset investment grew a little slower also at +3.9% y/y, industrial production was up +5.3% y/y, both lower than May’s numbers. Retail sales was the big miss at +2.0% y/y with the unemployment rate officially holding at 5.0%. Weak diesel demand from manufacturing and construction was expected to persist in the second half as China grappled with a listless real estate sector that ties up about 70% of its household wealth. China surprised markets by cutting major short and long-term interest rates, although by only -0.1%. China’s previous policy easing was last August.
After only one month, the Japanese Yen is 15% stronger versus the US Dollar, hitting 140 briefly in early August as the Bank of Japan increased its target policy rate to
0.25%, up from a range of zero to 0.1% (see graph left). The central bank also issued plans on July 31 to halve its monthly government bond purchases – now worth around six trillion yen (US$39 billion) – by gradually reducing the QE amounts to the end of the first quarter of 2026. This modest tightening (if really even that) changed the narrative around the direction of the economy and exports as it is only the second time the BOJ raised rates since 2007. This tiny tightening still caused a mass unwind of the Yen carry trade (borrowing in cheap Yen and investing elsewhere with higher rates such as Mexico), resulting in the massive 15%+ currency move.
Macro: US
The US Federal Reserve The US Federal Reserve came out a lot more dovish than expected at their late-July meeting as Chair
Powell’s commentary dripped with cutting language (while reserving the right to leave rates as they are). The markets bid up bets for a total of FIVE 25-basis-point cuts by the end of the year, with a 50-basis-point cut in September, and three 25s in Q4 2024. And, do not forget another three 25-basis-point cuts in the first half of 2025. If GDP falls, then sure that is possible. However, the Atlanta Fed’s US Q3 GDP expectations were last at +2.5% annualized, US inflation was still above target (+3.3% for Core Inflation – see top of next page) and payrolls expanding with unemployment still historically low at 4.3% (even if the rate of growth was disappointing at +114,000 for July versus +175,000 expected). The employment cost index, which measures wages and benefits, increased +0.9% in Q2, after rising by the most in a year at the start of 2024, further indicates elevated but slowing increases. The US federal debt was revised upward last month as the current year deficit moved from $1.5 trillion to $1.9 trillion on military, migrant and student loan spending. The interest expense of the US public debt hit $1.095 trillion over the last twelve months. US federal debt is fast approaching $35 trillion and no one stands to benefit more from rate cuts than the Federal government. The Federal Reserve will never admit to it, but you can be sure there’s immense pressure on them to cut rates in order to slow down this interest expense spiral.
The Old Enemy of Shipping Costs is back as the Houthis effectively blocked the Suez Canal which connects Europe, the Middle East and Asia by their attacks on ships – including on an oil tanker owned by their
supposed friend Russia. Little relief on the home front as existing home sales fell to 3.89m, just slightly above the recent low of 3.85m. Housing payments (including taxes and various forms of insurance) are still a high 43.1% of median income, levels last seen back in 2007, right before the mortgage crisis. However, mortgage rates fell to 6.7% for the 30-year fixed mortgage, the lowest since February (rates haven’t been below 6.7% since May 2023). The share of credit card balances past due reached a 12-year-high, reaching 2.6% for balances 60 days past due in the first quarter. That’s up from 1.1% in 2021, when consumers were bolstered by pandemic-era support programs. The total amount of interest consumers paid on mortgages in 2023 rose 14% from a year earlier [… and] jumped 50% for other types of consumer debt, such as credit cards and auto loans, according to Moody’s Analytics.” On the positive side, the labor participation rate for prime adults aged 25 to 54 was 83.7%, the highest since February, 2002. So it seems that people have jobs but the positions do not necessarily pay enough or the pay is not distributed broadly enough.
Macro: Europe
European Central Bank Held Interest Rates Flat in July as expected to 3.75%, but warned that future reductions would depend on price pressures easing further. 
However, Chair Lagarde pointed out that September would be a likely target for further reduction. Eurozone inflation ticked higher to +2.6% annualized for July, increases in energy and goods offset service price declines. Q2 2024 GDP grew at +0.3% for the quarter (+1.2% annualized), about half the rate of the US. Ireland, Spain and France contributed to the high side and Germany and Italy underperformed slightly. German Factory Orders (left) continued their decline, falling -0.9% month on month and -15.4% year-on-year. In combination with the Semiconductor Index, the reading pointed to further contraction in demand for manufactured goods.
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource