Daily Comment (October 10, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

In today’s Comment, we begin with an update on the war in Ukraine, with a special look at the bridge attack.  China news comes next, where we discuss the U.S.’s further tightening of semiconductor export controls.  The international news roundup follows where we note that the BOE is preparing markets for what follows after its Gilt intervention activities end.  We close with economics and finance news.

Ukraine War:  We cover the attack on the Kerch Strait Bridge and other news items from the conflict.

(Source:  Russia Briefing)

Although the bridge was heavily damaged, it is still partially operable.  The footage of the railroad bridge in flames was notable, but according to reports, some rail traffic has resumed.  However, reports suggest that trains are moving slowly, perhaps worried about the structural integrity of the line.  In addition, as one would expect, security checks have intensified, which has slowed traffic.  Finally, some lanes remain open for auto traffic, but trucks have been banned.  To make up for the break in the bridge, a ferry service has restarted.

In response to the attack, Russia launched missile strikes (during rush hour no less) against Kyiv and several other cities in what looks to be a direct attack on civilian targets.  Moscow is threatening additional strikes in retaliation.

Overall, this attack is a massive blow to the Kremlin.  For those living in Crimea, the severing of the bridge will raise questions about their security.  For the Russian military, the logistical disruptions are coming at a bad time in the war.  There are rumors of yet another shakeup in the command structure.  There are also reports of growing dissention within the Putin regime.  The fact that this attack occurred around Putin’s birthday has to be problematic for the Russian president.

China News:  As General Secretary Xi prepares for a third term (unprecedented in the post-Mao era), the Biden administration is continuing to restrict semiconductor chip sales to Beijing.

International Roundup:  The BOE prepares the Gilt market for the Friday deadline of its emergency measures, and the U.S. details data protection measures for the EU.

Markets, economics and Policy:  We touch on the dollar, labor markets, and note the Economics Nobel prize winners.

  • This year, the dollar’s rise has been relentless. An aggressive turn in monetary policy has been behind the bullish turn.  Although by parity measures the dollar is overvalued, rarely does valuation alone turn a market.  Historically, strong trends in currencies become self-filling and require political action to turn.  Often, bull markets in the dollar face political pressure from the manufacturing sector.  We are starting to see signs of this pressure building.  We would note that since 1970, manufacturing production (as measured by the subindex of industrial production) rises by 2.2% per year; however, when the JPM dollar index rises by more than 7.5% per year, manufacturing declines by 0.4% per year.
  • As bank earnings are released this week, we note that banks are raising loan-loss provisions.
  • How tight are labor markets? So tight that criminal records are no longer a barrier to employment.
  • Ben Bernanke, along with Doug Diamond and Phillip Dybvig (of Washington University here in River City) have been awarded the Nobel Prize for Economics.[2]

[1] Along with some rather funny twitter memes.

[2] Yes, we know that’s not the official name.

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