Russia/Ukraine War Update - May 12th, 2022

*** MILITARY SITUATION ***

Russian forces did not make any significant advances on May 11, and Ukrainian forces took further ground northeast of Kharkiv. The Ukrainian counteroffensive north of Kharkiv City has forced Russian troops onto the defensive and necessitated reinforcement and replenishment efforts intended to prevent further Ukrainian advances towards the Russian border. Russian efforts along the Southern Axis and in Donetsk and Luhansk Oblasts remain similarly stalled, and Russian forces have not made any significant gains in the face of continued successful Ukrainian defenses.

A soldier of Russian Rosguardia wears an attached letter Z, which has become a symbol of the Russian military

According to Russian military sources:

-Sunday night, Ukraine tried to take back snake island. The attack appears to have been timed to preempt Russia’s Victory Day celebrations on Monday. The anticipated victory did not materialize. Russia clobbered the Ukrainians–losses included the death of more than 60 Ukrainian marines and members of elite AFU units, four fixed wing combat aircraft, 10 helicopters, 3 boats and 30 unmanned aerial vehicles. Intel Slava Z reports that a U.S. Marine Lt. Colonel and a British Special Boat Squad Major accompanied the first wave of Ukrainian attacks and are missing. If true, this creates a definitive casus belli for Russia if it chooses to retaliate against the United States and NATO.

-Russian news agencies have reported that Russian forces hit two ammunition depots in the Chernihiv region of Ukraine overnight. Reuters reports the defence ministry also said Russia had destroyed a Ukrainian S-300 air defence missile system in the Kharkiv region and a radar station near the city of Odesa.

-Firing from Ukraine has killed one person and wounded seven in the Russian border village of Solokhi in the province of Belgorod, the regional governor, Vyacheslav Gladkov, has said according to Reuters.

*** ECONOMIC & POLITICAL ***

-President Sauli Niinisto and Prime Minister Sanna Marin of Finland made a joint statement on Thursday morning, confirming their nation’s desire to become part of NATO. The country refrained from asking for accession during the Cold War, but made a U-turn after the Russian attack against Ukraine in February. The statement expressed the view that “as a member of NATO, Finland would strengthen the entire defense alliance.” The two officials said their country “must apply for NATO membership without delay”.

-Ukraine has said it will suspend the flow of gas through a transit point that it says delivers almost a third of the fuel piped from Russia to Europe through Ukraine. GTSOU, which operates Ukraine’s gas system, said it would stop shipments via the Sokhranivka route from Wednesday, declaring “force majeure”, a clause invoked when a business is hit by something beyond its control. Gas flows from Russia’s Gazprom to Europe via Ukraine fell by a quarter on Wednesday.

-US stocks were lower as riskier sectors led the declines that accumulated into the close, while it was a very choppy session in the aftermath of the firmer than expected US CPI data with the tape action seemingly a primary factor of technicals (positioning/flow/light liquidity) than a barometer for fundamentals.
SPX -1.65% at 3,935, NDX -3.06% at 11,968, DJIA -1.02% at 31,834, RUT -2.48% at 1,718.

APAC stocks were pressured after the losses on Wall St where the major indices whipsawed in the aftermath of the firmer than expected US CPI data.

European equity futures are indicative of a softer open with Eurostoxx 50 -2.3% after the cash market closed with gains of 2.6% yesterday.

DXY traded indecisively around 104.00, antipodeans lag, USD/JPY is back below 130.00.

The crypto collapse persisted with Bitcoin breaching the 27,000 level to the downside.

Fed's Bullard (2022 voter, hawk) said the Fed has teed up 50bps hikes for future meetings and feels the goal should be about 3.5% on Fed Funds rate by year-end, while he added that 75bps is not his base case and April inflation data was "hot" but not far from what was expected, according to Reuters. Fed's Bostic (2024 voter) said the Fed understands inflation is too high and will act to bring it down, while he added that price pressures will ease if supply-demand gaps narrow and he will support moving rates more if inflation persists.

PBoC Vice Governor Chen said the central bank will step up support for the real economy and that they have guided loan interest rates to decline, while Chen added the priority for the PBoC will be to support growth and will boost support for weak links and targeted areas, according to Reuters.

UK Chancellor Sunak is preparing a new support package for UK households and is set to outline help this summer when a further rise in energy price caps are due to be unveiled. Furthermore, Sunak is keeping a windfall tax on the UK energy sector as an option to fund the package unless oil companies bring forward new investment plans, according to FT.

-Baby formula supply shortages in the US have started to have an effect on Canadian families, which are now struggling to procure breastmilk substitutes. A baby-food crisis recently hit the US as already existing supply chain issues were exacerbated by a major product recall by Abbott Nutrition, which voluntarily pulled from shelves three of its brands of powdered baby formula after reports of bacterial infection and illness among infant consumers, including two who died. In the US, nearly 40% of infant formula is now out of stock in over 11,000 stores, according to reports by online retail analyst Datasembly, which has led to increased demand for the product, as some retailers have even introduced rationing to combat hoarding.

-The Chinese military made critical remarks on Wednesday after the US sailed one of its warships through the Taiwan Strait on Tuesday in a show of flag mission. Beijing said that Washington had a habit of “staging dramas” over the self-governed island that China considers to be under its sovereignty. The US supports Taiwan against China, while maintaining strategic ambiguity over its status. The US Navy sent the USS Port Royal, a Ticonderoga-class guided missile cruiser of the 7th Fleet, to pass through the body of water separating Taiwan from mainland China. The ship remained in international waters while navigating the corridor on Tuesday in a mission meant to demonstrate American “commitment to a free and open Indo-Pacific,” according to a statement.

-A Chinese Z-10 attack helicopter has, apparently, entered Taiwan’s air defense identification zone, or ADIZ, and, for the first time, crossed the so-called “median line,” an informal boundary running down the center of the Taiwan Strait. The appearance of the attack helicopter, which is operated by both the People’s Liberation Army Ground Force and the Air Force Airborne Corps, and is also designated WZ-10, marks the latest new Chinese type to enter this sensitive part of the ADIZ. It also points to the growing importance of rotary forces around the Taiwan Strait, including the massive Chinese helicopter base that’s strategically positioned to support future operations in the Strait or even a potential invasion of Taiwan.

-On Tuesday night, the House passed a nearly $40 billion bill for new Ukraine aid as Washington continues to escalate its role in supporting Kyiv in its war against Moscow. The measure passed in a vote of 368-57, with only Republicans voting against the bill. The legislation now moves to the Senate, which could hold a vote this week.

-European Commission President Ursula von der Leyen failed to reach agreement with Hungary on Monday to secure the country’s backing for an oil embargo on Russia, setting back hopes of a quick deal on Brussels’ energy sanctions proposals. Slovakia, the Czech Republic, Bulgaria and Croatia are also making their acceptance of an oil embargo conditional on assistance from Brussels. EU officials and diplomats say they remain confident a deal to phase in a ban on Russian oil will eventually come together but hopes of wrapping it up quickly are receding.

-The BLS reported that headline CPI prices eased down to a 0.3% (0.33% unrounded) M/M clip from a blowout 1.2% print last month, though this was higher than expectations for a 0.2% gain. Energy prices slid 2.7% M/M as a pullback in retail gasoline prices led to a 5.4% drop in energy commodities, which was partially offset by a 1.3% increase in energy services (look for energy prices to jump again in May, now that gasoline is back to all time highs). Looking at the other notable components, food stayed hot as food at home climbed 1.0% mom and food away from home rose 0.6% mom. Coupled with negative base effects, Y/Y headline CPI slowed to 8.3% from 8.5% in March, with the latter month likely reflecting the peak in inflation even if the annual print was stronger than the 8.1% expected. Core CPI was an even stronger beat, rising 0.6% (0.57% unrounded) mom versus consensus at 0.4%. This led to the Y/Y rate dropping to 6.2% from 6.5%, reflecting the aforementioned unfavorable base effects.

A remarkable statistic from Brean Economics shows just how widespread the inflation was: "Of the 95 CPI components we can track back to 1998 (which cover 98% of the CPI) 63% show year-over-year price gains of 6% or more in April, which is the highest share on record." One of the main drivers of the upside surprise was a record 18.6% increase in airline fares, which added 13bp to core CPI alone and reflects a boost from reopening pressures. This contributed to a broader transportation services increase of 3.1% mom, with car truck rental and motor vehicle insurance prices also both rising 0.8% mom. Adding to the reopening theme, lodging gained 1.7% mom.

Even outside of the reopening-related categories, there were notable broad based gains across services amid tight labor markets and accelerating wages. OER rose 0.45% mom and rent of primary residence accelerated to 0.56% mom. Medical care and other personal services both gained 0.5% mom, and recreation was up 0.4% mom. Water/sewer/trash and education/communication services both rebounded from negative readings in March to 0.3% mom and 0.2%, respectively. Core goods was more mixed. On one hand, new cars rose 1.1%—the new methodology discussed earlier likely contributing to a stronger reading this month — household furnishings/supplies and recreation goods both rose 0.5%, alcohol was up 0.4% mom, other goods rose 0.3% mom, and medical goods edged up 0.1% mom. On the other hand, education/communication collapsed 2.6% mom, apparel slid 0.8% mom, and used cars fell 0.4% mom. There have been mixed signs of progress on supply chains in the US, which can help explain the more mixed readings across goods.

Looking ahead, Bank of America notes that the Russia/Ukraine conflict and China lockdowns remains risks to commodity prices and global supply chain conditions, which could lead to further choppiness.

-The national average price for regular gasoline climbed more than four cents on Tuesday to $4.37 a gallon, according to AAA. That takes out the prior record of $4.33 set on March 11. The gas spike — prices are up 17 cents in the past week alone — will only add to inflationary pressures that have raised recession fears, rocked financial markets and soured Americans' views on the economy. The national average dipped to as low as $4.07 a gallon in April after the record-setting release of oil from emergency reserves and as oil prices cooled off. But as industry analysts predicted at the time, that relief proved to be short-lived and minor. Pump prices are up about 25% since Russia's invasion of Ukraine set off shockwaves in global energy markets.

Consumer debt and credit rose 1.7% in the first quarter to $15.84 trillion, a new record. The increase, which stemmed largely from housing debt, came amid surging inflation and rising rates. Student loan debt climbed by $14 billion in the first quarter, bringing the annual increase to 6.5%.

-Shares of Amazon have given up nearly all of their gains from the pandemic. The stock skyrocketed in 2020 and 2021 as consumers shunned physical stores and flocked to online retailers for everything from face masks to office chairs. Amazon and other technology stocks are getting crushed amid a broader market sell-off.

-Poland will connect its ports to speed up the supply of fuel to Ukraine, writes the local paper Wprost. Fuel will be delivered to Ukraine through the ports of Gdansk and Swinoujscie. And then send by train, for which the schedule of Polish and Ukrainian trains will be synchronized. Now about 60,000 tons of fuel per month passes through Poland to Ukraine. The goal is to reach 200,000 tons, Ukrainian Economy Minister Yulia Sviridenko told the newspaper.

-Russian President Vladimir Putin had plans to take all of Ukraine, according to abandoned Russian documents which Ukrainian authorities reportedly found in the Ukrainian town of Trostyanets in Sumy Oblast. The documents, which Ukrainian authorities said they found while investigating Trostyanets, a northeastern Ukrainian town Russian troops occupied for a month during the war, suggest that while Russia is currently focusing its attacks on the Donbas in eastern Ukraine, Putin’s ambitions lie far beyond the east.

-President Vladimir Putin is expected to become more unpredictable and could order martial law in Russia to support his ambitions in Ukraine, US Director of National Intelligence Avril Haines said Tuesday. Putin’s aims are greater than Russian military capabilities, and that “likely means the next few months could see us moving along a more unpredictable and potentially escalatory trajectory,” Haines told a Senate hearing. “The current trend increases the likelihood that President Putin will turn to more drastic means, including imposing martial law, reorienting industrial production, or potentially escalatory military options to free up the resources needed to achieve his objectives,” she said. Haines also said Putin is not likely to order the use of nuclear weapons unless the Russian homeland faces an “existential threat.”

-Despite all the early idealism and optimism regarding Ukraine's desire to join the European Union after it applied to join four days after the Russian invasion kicked off in February, French President Emmanuel Macron has just poured cold water on the prospect, apparently in an effort to sideline to whole accession question in favor of alternative options. While it's typical for the membership process to take years, with some European countries - especially the Baltic states - previously saying they would back Ukraine being "fast-tracked", Macron in Monday statements admitted Ukraine's accession could take "several decades".

-The Chinese Communist Party (CCP) is using an advanced intelligence-gathering satellite for hunting US aircraft carriers and other military assets worldwide, according to South China Morning Post. Space researcher Yang Fang and her team at DFH Satellite Co., Ltd in Hong Kong published a report in the domestic peer-reviewed journal Spacecraft Engineering that reveals China's People's Liberation Army (PLA) used an AI-powered satellite to detect and "live stream" the USS Harry S. Truman. A remote sensing satellite, powered by artificial intelligence technology, lurked in low Earth orbit above North America on June 17 of last year and automatically detected the Nimitz-class aircraft carrier off the coast of Long Island, New York. It captured footage of the vessel conducting naval maneuvers, such as adjusting formation and making emergency maneuvers. Fang said the satellite is incredibly powerful and can analyze hundreds of frames of high-definition images per second for strategic targets -- something that would take ground-based computers much longer. And humans would struggle at this very intel-gathering task. Yang's team determined Beijing has made a breakthrough in "weight reduction" and image recognition with the algorithm that only needs about 3% of the calculation power used by traditional algorithms when conducting similar tasks. The satellite is equipped with a family of AI chipsets that can perform multiple tasks, and if one chip fails, another would come online as backup and immediately take over tasks.

-Key decision-makers in non-aligned Finland and Sweden are set to announce their positions on NATO membership this week in what could be a serious blow to Russia as its military struggles to make decisive gains in Ukraine. If Finland’s president and the Social Democrats who govern both countries ignore Moscow’s warnings and come out in favor of accession, NATO could soon add two new members right on Russia’s doorstep. Such an expansion by the Western military alliance would leave Russia surrounded by NATO countries in the Baltic Sea and the Arctic, as well as represent a serious setback for Russian President Vladimir Putin.

-The head of the United Nations Human Rights Monitoring Mission in Ukraine, said there is “credible” information regarding the mistreatment of Russian prisoners by Ukrainian troops during the war. “We have received credible information of torture, ill-treatment and incommunicado detention by Ukrainian Armed Forces of prisoners of war belonging to the Russian armed forces and affiliated armed groups,” Bogner said on Tuesday.

-North Korea said it detected an outbreak of the stealth Omicron virus and its leader Kim ordered a nationwide lockdown, while South Korea is reportedly willing to provide humanitarian assistance to North Korea, according to Reuters and Newsis.

-The Chinese military deployed forces all around the island of Taiwan over the weekend in a set of large-scale military drills that one Chinese military analyst called a “rehearsal of possible real action.” On Monday, the Chinese People’s Liberation Army (PLA) announced its Eastern Theater Command organized maritime, aerial, conventional missile and other forces around Taiwan and carried out drills around the island from Friday to Sunday. The Eastern Theater Command said the drills were intended “to test and improve the joint operations capability of multiple services and arms.” While Taiwan governs itself as an independent nation, China considers the island a part of its territory and Chinese officials have repeatedly discussed “reunification” with the island, including by means of military force. The Chinese state-run Global Times publication reported maritime, aerial, conventional missile and “other forces” participated in the drills around Taiwan. During the drills, China’s Liaoning aircraft carrier deployed east of the island while a large number of Chinese aircraft and warships carried out drills to the island’s west.

-China has been honing its ship-killing skills for potential future conflicts on new targets in a remote desert, according to new satellite photos reviewed by USNI News. New analysis shows the People’s Liberation Army is testing the ability to hit ships in port with long-range ballistic missiles. Since USNI News reported China has been building aircraft carrier targets in the Takmalakan Desert, other target sites have emerged forming a string of large-scale target ranges running along the eastern edge of the desert, according to new satellite photos. Several of these are naval and two have layouts that appear to be modeled on ships in port. Eight miles southwest of an elaborate aircraft carrier layout, a site with full-scale piers and a destroyer-sized ship-like target was constructed in December. A test missile hit a dead center on the ship replica in February and thent the target was then quickly disassembled and is now gone, according to more recent images. This new target was discovered as part of the research into aircraft carrier targets, which had been found by All Source Analysis (ASA) with more details revealed by high-resolution satellite imagery from Maxar Technologies.

-Director of National Intelligence Avril Haines told Congress on Tuesday that, in the view of the US’ spy agencies, Russian President Vladimir Putin was gearing up for a “prolonged” conflict in Ukraine, and was looking to establish control of Ukraine’s southern coast, from the Donbass in the east to Transnistria in the west. “We assess President Putin is preparing for a prolonged conflict in Ukraine during which he still intends to achieve goals beyond the Donbass,” Haines told a hearing of the Senate Armed Services Committee. Haines explained that according to her “indications,” Putin is seeking to extend Russian control from the Donetsk and Lugansk People’s Republics – which collectively make up the Donbass region – along Ukraine’s Black Sea coast to the breakaway province of Transnistria on the Moldovan border.

Doing so would be a major strategic win for Russia, and would leave Ukraine landlocked. However, Russia’s objectives in this regard are unclear. Upon sending troops into Ukraine in February, Putin stated that Russia’s military operation was intended to “demilitarize” Ukraine, to “denazify” its leadership, and to protect the Russian-speaking population of the Donbass republics, who have lived under legal and military persecution since 2014. Putin did not state any clear territorial end goals in Ukraine. To take land up to Transnistria, according to the US’ spy chiefs, Putin would need to declare a full mobilization and call up additional troops, something that has not happened yet. However, with fighting raging along the borders of the Donbass republics and Ukrainian territory, Haines said that Russia’s currently deployed forces would likely try to “crush the most capable and well-equipped Ukrainian forces fighting to hold the line in the east” in the “near term.”

While the US and its NATO allies have poured billions of dollars worth of weapons into Ukraine in a bid to slow this advance, Haines claimed that “Putin most likely also judges that Russia has a greater ability and willingness to endure challenges than his adversaries,” and that “he is probably counting on US and EU resolve to weaken as food shortages, inflation and energy prices get worse.”