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 around 35,000 in June. Ukraine continued to attack Russian oil refineries, fuel storage facilities and airfields, which affected the war at a strategic level. Ukraine also made particular effort to damage / destroy radar facilities, both tactile mobile sites as well as strategic nuclear ones in preparation for receiving F-16s from the US and NATO. 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. North Korea announced that they would dispatch engineers to Donetsk, Ukraine, which remains occupied by Russia, with potentially 10,000 troops to follow in exchange for more advanced military technology, perhaps also to move some Russian military construction to a non-sanctioned country. North Korea already was sending artillery shells, ammunition and small arms to Russia. Chinese and Russian companies were reportedly developing an attack drone similar to an Iranian model Russia is using in Ukraine – looks like China is also getting ready to risk taking sides, even if that means running afoul of the US and Europe.
The European Union agreed on a 14th package of sanctions against Russia over its war in Ukraine, banning re-exports of Russian liquefied natural gas in EU waters but stopped short of banning imports as the bloc did in 2022 for Russian seaborne oil as the EU is still dependent on Russian natural gas. They did impose sanctions on specific Russian ships, identifying 17 crude oil and refined products carriers. In addition, German importer Uniper terminated the last of its long-term natural gas supply contracts with Gazprom.
Gazprom cut natural gas production by -13% to an annual low of 359 billion cubic meters (bcm) last year from 413 bcm in 2022 as the European market declined. Russia’s overseas crude flows (see right) have been tracking below year-earlier levels since late April, with the gap widening to as much as half a million barrels a day. Reportedly, this fell to 3 mbpd for the last week of June on scheduled maintenance. This decline may also be due to Russia getting closer to its agreed-upon output cuts that was part of OPEC+ producers to support the market, pressure from international sanctions and / or war damage to Russian refineries.
Macro: Asia
China May Economic Headlines Were Negative, on balance as fixed asset investment grew +4.0% y/y and industrial
production was up +5.6% y/y, both lower than April’s numbers. Retail sales regained some ground, up +3.7% y/y with the unemployment rate holding at 5.0%. The graph right shows the longer-term disparity between industry and consumers, underscoring China’s dependence on exports to sell those manufactured goods. 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. This imbalance came to a head as China faced new electric vehicle tariffs of up to 48% from Europe as 37% of EV exports head to Europe with another 12% to the UK. Electricity generation increased +2.3% y/y in May (vs. +3.1% in April), confirming the industrial slowdown. Chinese property data remained weak as average prices in the new home market fell -0.7% and the secondary property market declined by -1.0% m/m in May, continuing their April weakness.
The Japanese Yen is at its lowest level since 1986 against the US Dollar, losing 53% of its value from the 2011 peak. Why? One reason was the huge divergence in central bank policy. The Bank of Japan was still suppressing interest rates, with an after-inflation policy rate of -2.8%. Meanwhile, the Fed Funds Rate was over 2% higher than CPI. The other was a big differential in growth rates. Adjusted for inflation, Japan’s economy contracted -0.2% over the last year while the US economy expanded +2.9%. Loosely put, better investment prospects in the US.
Macro: US
The US Federal Reserve came out a little more hawkish than expected at their mid-June meeting as the “dot-plot” of interest rate expectations was higher than expected. Their median core PCE inflation for 2024 was revised higher to
+2.8% (versus +2.6% prior). Officials described recent inflation developments as “modest” in their post-meeting policy statement, a slight upgrade from last month. However, the markets were still betting on a cut in September, again in Q4 2024 and another in Q1 2025. No hikes are expected at the upcoming July 30-31st meeting as payrolls rose by 206,000 but job growth in the prior two months was revised down by 111,000. The median forecast per Bloomberg called for a 190,000 increase. The unemployment rate rose to 4.1% as more people entered the labor force, and average hourly earnings cooled to +3.9% in June from a year ago, matching the smallest annual advance in three years. The US federal debt was revised upward as the current year deficit moved from $1.5 trillion to $1.9 trillion. As the graph to the left shows, the US is well on track to surpass the highest debt-to-GDP ratio ever, including that seen in World War Two.
An Index of US Pending Existing-Home Sales unexpectedly fell in May to the lowest level on record as elevated mortgage rates and high prices discouraged prospective buyers. Contract signings from the National Association of Realtors decreased -2.1% to 70.8 last month, the lowest reading in data going back to 2001. Mortgage rates fell a little but the average 30-year loan was still around 7.25%. The median sales price of existing homes reached a new high to $419,300. The supply of new homes in the US moved up to 9.3 months in May, the highest level since October 2022, but between high interest rates and prices, that inventory is not moving – new home sales were down -16% in the past year. Evidence of consumer weakness was seen in Retail Sales as while it increased +2% over the last year but after adjusting for higher prices they were actually down -1.2%. Both of these numbers came in well below the historical averages of +4.6% nominal and +2.0% real. Finally, another sign that all is not right with the economy was that the number of people starting to receive disability payments reached record levels, to basically double that before COVID (40,000 new monthly recipients recently versus 20,000 in 2020).
Macro: Europe
European Central Bank Held Interest Rates Flat in June to 3.75% for the first time in almost five years, but warned that future reductions would depend on price pressures easing further. Eurozone inflation slowed slightly to +2.5% annualized for June, but policymakers remained concerned by strong increases in services prices that partly offset weaker growth in energy and fresh food costs. Services had a strong inflation reading of +4.1%. French and British elections will leave their mark in early July, both of which feature self-inflicted political wounds by the ruling party (who is obviously not expected to lead any longer!).
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource