Daily Comment (November 22, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

The Daily Comment will go on hiatus beginning Wednesday, November 23, and will return on Monday, November 28. 

Our Comment today opens with an update on the Russia-Ukraine war, including news of an important new Ukrainian effort to recapture land in the southern part of the country.  We next review a wide range of other international and U.S. developments with the potential to affect the financial markets today, including conflicting reports about whether the OPEC+ oil exporters will boost or cut production.

Russia-Ukraine:  Ukrainian forces continue to press their counteroffensive in the northeastern Donbas region and in southern Ukraine on the east bank of the Dnipro River, while Russian forces continue to attack the northeastern city of Bakhmut while simultaneously building out their defensive lines in preparation for winter.

  • The Ukrainian activity on the east bank of the Dnipro River is reportedly focusing on taking control of the Kinburn Spit, a strategic peninsula jutting out into the Black Sea at the mouth of the river. If the Ukrainians can push the Russians out of the peninsula, they could reduce the artillery attacks on the key southern port city of Mykolaiv and gain control over the southernmost reaches of the river.
  • We continue to believe that the Russian offensive around Bakhmut, led by Russia’s Wagner Group mercenaries, is designed, at least in part, to burnish the leadership credentials of Wagner Group leader Yevgeny Prigozhin as he works to boost his position in preparation to eventually challenge President Putin for power.

Global Oil Market:  Officials with the Organization of the Petroleum Exporting Countries said that the cartel and its Russia-led allies are considering a boost of 500,000 barrels per day in their crude oil production to help keep global supplies steady as the West imposes new sanctions on Russian oil.  However, Saudi Arabia and some other major exporters later pushed back on the idea and insisted that the group will follow through with its recent decision to cut output.

  • Various reports in recent months have suggested that the OPEC+ group would be hard pressed to boost its output by 500,000 barrels per day. Besides, with China imposing big new pandemic lockdowns and much of the world teetering on the brink of recession, it would seem that OPEC+ would prefer to cut production and buoy prices rather than boost output and drive prices lower.
  • Therefore, the statement about boosting output is being taken as a sop to President Biden now that federal officials have said that Saudi Crown Prince Mohammad bin Salman cannot be prosecuted for his role in the 2018 killing of a Saudi dissident journalist.

China:  New COVID-19 infections rose to nearly 28,000 today, close to a record and enough to raise concerns that the latest wave will weigh on the economic activity in China and beyond.  Despite Beijing’s directive to refine and water down President Xi’s draconian Zero-COVID policies, the new, widespread wave is prompting local officials to impose mass lockdowns in cities around the country.

United Kingdom:  In its latest economic forecasts, the Organization for Economic Cooperation and Development (OECD) projected that the U.K. will be the weakest G20 economy except for Russia over the next two years.  Reflecting challenges such as severed trade relationships after Brexit and the impact of high energy prices, the OECD forecasts that British gross domestic product will fall 0.4% in 2023 and rise just 0.2% in 2024.

Eurozone:  National Bank of Austria Governor Robert Holzmann, who is also a member of the European Central Bank’s governing council, backed a third straight 75 bps rise in the ECB’s benchmark interest rate at its next policy meeting in mid-December. The move, which Holzmann argued was necessary to show the ECB’s commitment to fighting inflation, would raise benchmark borrowing costs to 2.25%.

  • As in the U.S., rising interest rates are creating challenges for borrowers in the Eurozone and threatening to help push the economy into recession.
  • Illustrating the impact in Spain, where most mortgage borrowers have variable-rate loans, major banks and the government have agreed on a relief package for the country’s most vulnerable borrowers. The package includes reduced interest rates on mortgage loans for a five-year period.

United States-European Union:  With the Biden administration’s $369 billion package of subsidies to boost U.S. technology investment set to come into force on January 1, officials from Germany and other EU states are considering whether to launch their own subsidy program to keep firms investing on the Continent.  The officials have become increasingly alarmed at how the new U.S. program has already convinced many EU firms to shift their capital investments to the U.S.

United States-Philippines-China:  In a meeting with Philippine President Marcos yesterday, U.S. Vice President Harris reaffirmed Washington’s commitment to defending the country against aggression under a 1951 treaty.  Harris also announced a range of U.S. assistance programs and initiatives to help the Philippines deal with climate change and looming food and energy crises.

  • Separately, under a 1999 “Visiting Forces Agreement” and a 2014 “Enhanced Defense Cooperation Agreement,” the U.S. has been boosting the number of troops it sends on a rotating basis to Philippine military bases.
  • Despite the Philippine government’s effort to keep from antagonizing China as it steps up military cooperation with the U.S., the moves underline how much the Philippines feels threatened by China’s territorial aggressiveness in the maritime realm.

U.S. Railroad Industry:  Yesterday, one of the country’s largest railroad unions said that its members voted to reject a new wage deal brokered by the White House, raising the risk of a major labor strike as soon as early December.  That means four of the 12 major railroad unions have rejected the brokered deal, primarily over sick-leave policies.  This has triggered a cooling-off period that requires the companies and unions to go back to the negotiating table.  If the companies and unions can’t reach a deal by December 9, and if Congress doesn’t intervene to prevent it by legislation, the nation could face a crippling railroad strike that would be an important headwind for the economy and financial markets.

U.S. Housing Market:  According to data from real-estate brokerage Redfin (RDFN, $4.61), investor purchases of homes in the third quarter were down 30% from the same period one year earlier.  The big drop reflects the sudden, sharp weakening in the housing market as the Federal Reserve keeps pushing interest rates higher.  We continue to believe that the impending recession will probably be rather garden-variety, but a sharper-than-anticipated drop in the housing market could make it a more severe.

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