Russia/Ukraine War Update - June 16th, 2022

 *** MILITARY SITUATION ***

-Ukraine has ignored a Russian ultimatum to surrender Sievierodonetsk, with Moscow controlling 80% of the embattled eastern city that has become a focal point of Russia’s advances in the east of the country. Russia ordered Ukrainian forces to stop their “senseless resistance and lay down arms” from Wednesday morning and accused Kyiv of disrupting plans to open a humanitarian corridor for civilians to leave the area.

-Russian forces continued ground assaults in and around Severodonetsk but have not yet captured the Azot industrial plant or taken full control of the city as of June 15. Russian forces have largely isolated Ukrainian troops in Severodonetsk from their lines of communication and are attacking Severodonetsk from multiple directions. Russian troops also conducted an unsuccessful assault in Toshkivka, likely to drive northwards towards Lysychansk instead of conducting an opposed river crossing after having destroyed bridge access to Lysychansk from Severodonetsk. Russian forces continued to fire on settlements surrounding Severodonetsk to further isolate Ukrainian troops and complicate their withdrawal or re-supply efforts.

Russian forces continued ground assaults east of Bakhmut and made marginal gains along the critical T1302 Bakhmut-Lysychansk highway on June 15. Russian forces reportedly broke through Ukrainian defenses in Vrubivka and are fighting for control of Mykolaivka, Yasylivka, Yakovlikva, and Berestove, all settlements within 10 kilometers of the T1302

Russian Kalibr missiles hit the area of the settlement of Zolochiv in the Lviv region. As a result, an ammunition depot for foreign weapons transferred to Ukraine by NATO countries, including 155-mm M777 howitzers, was destroyed. Among other targets for Russian missiles there was the Voznesensk military airfield in the Mykolaiv region. Russian strikes destroyed aviation equipment of the Ukrainian Air forces.

-The Russian order of battle in the Donbas remains opaque. It appears that Russia is relying on the militias of Donetsk and Luhansk as the primary strike forces to retake territory in their respective regions. Russia is supplying artillery units, electonic warfare, anti-aircraft/air defense, drone intelligence and air operations with both fixed and rotary wing craft. I think some western analysts made the mistake of assuming that Russia was providing the lead strike forces and that the militias were tagging along to provide support as needed. But there are indications that the bulk of Russian forces have not been committed to battle and are being kept in reserve along with Russia’s more advanced weaponry. I believe that the Russian General Staff want to have a card or two to play in the event that NATO decides to insert itself into the fray.


*** ECONOMIC & POLITICAL ***

-The Fed hiked rates by a stunning (but expected) 75bps - the biggest hike since 1994. Esther George dissented (preferring 50bps). Fed expresses that is "strongly committed" to fighting inflation. The Fed sharply raised its rates outlook (to meet market expectations) and sharply lowered its growth and employment outlooks. Since the last FOMC statement on May 4th, all hell has broken loose in global capital markets (and economies). US equities have collapsed (Nasdaq -15%) and US Treasury yields have exploded higher. Gold is down around 3% since the last FOMC, mirroring the 3% or so gain the USDollar Index...(NOTE everything shifted after last Friday's CPI). The ugliness in bond-land was led by the short-end (with 2Y yields up almost 60bps since the last FOMC and 30Y yields up 40bps) pushing the yield curve back into inversion once agaiWhile the last FOMC statement crowed of the underlying strength of the US economy, macro data has dramatically and serially disappointed in the month or so since...

While the last FOMC statement crowed of the underlying strength of the US economy, macro data has dramatically and serially disappointed in the month or so since. Rate-hike expectations overall have soared higher since the last FOMC statement, mostly driven in the last week post-CPI. With the market now pricing in 100% odds of 75bps today and in July, and 40% chance of 75bps in September too. Today will also see the release of new forecasts by Fed members. The current market expectations are dramatically above The Fed's last dot-plot, so we expect significant changes.

Here's what The Fed did:

The Fed raised its benchmark rate by 75 basis points -- the biggest increase since 1994 -- to a range of 1.5%-1.75%, in line with investors’ and economists’ expectations

Kansas City Fed President Esther George dissented in favor of a 50 basis-point hike

FOMC adds a line saying it’s “strongly committed to returning inflation to its 2% objective” and removes prior language that said the FOMC “expects inflation to return to its 2% objective and the labor market to remain strong”

Reiterates path on balance-sheet reduction that took effect June 1, shrinking bond portfolio by $47.5 billion a month and stepping up to $95 billion in September

The Fed shifted its dots up to the market.

New dot-plot projections showed sharp increase from March, with federal funds target rising to 3.4% by year-end - implying another 175 basis points of tightening this year - and 3.8% in 2023, before falling to 3.4% in 2024; prior forecasts in March were for a 1.9% rate this year and 2.8% in 2023 and 2024. One crucial thing to note in the new dot-plot is that 2024 will be a year of dramatic uncertainty (and not just because of the election) with Fed members expectations ranging from a minimum of 2.0% and maximum of 4.0% - the biggest spread in FOMC history. Additionally, The Fed's economic projections showed a much bumpier soft landing expected, with the unemployment rate rising from 3.7% at end-2022 to 4.1% in 2024; growth forecasts were cut to 1.7% in 2022 and 2023, from 2.8% and 2.2% in March; Fed officials still expect inflation to come down significantly in 2023. 

-China has once again issued a pledge of verbal support to Moscow amid the ongoing war in Ukraine. A Wednesday phone call between Chinese President Xi Jinping and his Russian counterpart Vladimir Putin included Xi saying China backs Russia on "sovereignty and security". China is "willing to continue to offer mutual support (to Russia) on issues concerning core interests and major concerns such as sovereignty and security," Chinese state broadcaster CCTV quoted Xi as saying. Significantly, it was the second such 'positive' call between the two leaders since the Ukraine invasion began on Feb.24. Over the past years the two have become obviously closer amid increasing US economic measures intent on isolating both countries.

-The Ukrainian government requires another $5 billion each month to avoid steep budget cuts, a senior lawmaker said, appealing for more assistance from foreign countries despite billions in aid already provided by the United States and European allies.

-Sweden and Finland’s NATO applications could be in limbo for a year if they continue to harbor Kurdish groups Ankara deems as “terrorists,” the chair of Turkey's parliamentary foreign affairs committee says.

-Chairman of the Joint Chiefs of Staff Gen. Mark Milley at a press conference in Brussels on Wednesday said "the numbers clearly favor the Russians" in Ukraine as the two countries remain embroiled in war. "I would say the numbers clearly favor the Russians, in terms of artillery," Milley said, adding that the Russians "outnumber, outgun, and outrange" Ukrainian forces. "The Ukrainians are fighting them street by street, house by house," Milley said, stating that the fighting in the Donbas was "almost World War I-like." But he also emphasized that the battle is "not a done deal" and said a Russian victory isn't an "inevitability." "There are no inevitabilities in war," Milley said. "War takes many, many turns."

-A border checkpoint in Russia’s Kursk Region was attacked by Ukraine on Wednesday morning, according to local governor Roman Starovoyt. The Krupets crossing was targeted at around 7.30am local time, he wrote on Telegram. “There were no casualties or destruction” as a result of the incident, the governor said. The attack was suppressed by return fire from Russian border guards, he added. On Tuesday, six people were reportedly wounded and some 50 houses damaged when Ukraine shelled the village of Zaymishche in neighboring Bryansk Region.

-The US is targeting Russia with technology to evade the censorship of news on the war in Ukraine and access western media, Reuters is reporting. According to the news agency, the US government has pushed new, increased funding into three technology companies since the start of the Ukraine conflict to help Russians sidestep censors and access western media, according to five people familiar with the situation. The financing effort is focused on three firms that build Virtual Private Networks (VPN) - nthLink, Psiphon and Lantern – and is designed to support a recent surge in their Russian users, the sources said. VPNs help users hide their identity and change their online location, often to bypass geographic restrictions on content or to evade government censorship technology.

-The United States will provide an additional $1bn in security assistance to Ukraine for its efforts in the eastern Donbas, US president Joe Biden confirmed. The support package includes 18 additional howitzers with tactical vehicles to tow them, 36,000 rounds of 155mm ammunition for the howitzers and two Harpoon coastal defence systems, the defence department said.

-Two US veterans from Alabama who were in Ukraine assisting in the war against Russia haven’t been heard from in days and are missing, members of the state’s congressional delegation said. John Kirby, a national security spokesman at the White House, said that the administration wasn’t able to confirm the reports about missing Americans. “We’ll do the best we can to monitor this and see what we can learn about it,” he said.

-Europe’s unity over the war in Ukraine is at risk as public attention increasingly shifts from the battlefield to cost of living concerns, polling across 10 European countries suggests.

-"The White House is expected as soon as Wednesday to announce around $1 billion dollars worth of new weapons aid for Ukraine, including anti-ship rocket systems, artillery rockets, and rounds for howitzers, people familiar with the packages said," Reuters reports Wednesday morning. The anti-ship rocket systems in particular will be viewed from Moscow as another serious escalation, also given the mid- April sinking of the Moskva by Neptune anti-ship missiles. It was a humiliating blow to Russian forces given it was the flagship of Russia's Black Sea Fleet. This new expected weapons aid package could thus set the stage for more devastating Ukrainian attacks on Russian navy ships off Ukrainian harbors and ports. Earlier in the morning Bloomberg too reported that Biden admin is looking at the new tranche of US weaponry to be more than $650 million worth. Bloomberg is reporting further that the new package is to "include, for the 1st time, vehicle-mounted Harpoon anti-ship missiles."

Includes:
 vehicle-mounted Harpoon anti-ship missiles
 $320 million for secure radios & related equipment
 $55 million for thermal/night-vision optics
 $160 million for training

The Zelensky government has been begging Washington and the West for more arms, saying the fate of the Donbas is on the line as it's clear at this point Russian forces are steadily advancing and solidifying their hold over the east, and increasingly over southern regions too, potentially threatening Odesa.

-Ukrainian forces will, for the first time, receive two vehicle-mounted Harpoon anti-ship missiles, which Kyiv hopes will help push away an estimated 20 Russian warships currently blockading their Black Sea ports. The land-based weapon could enable Ukraine, one of the largest grain providers in the world, to resume its supply of food to parts of the Middle East, Africa and Asia. Despite Ukraine’s urgent need, however, the Harpoons won’t reach the battlefield for several months, U.S. officials told reporters at the Pentagon Wednesday. In order for Ukrainian forces to use the weapon, the Pentagon will first have to procure Harpoon launchers, while European allies will prepare to send missiles and other equipment. After that, Ukrainian troops will go through a weeks-long training course outside of Ukraine at other European military bases on how to operate the systems—just as they do with other high-end, American-made arms.

-Nato’s secretary general, Jens Stoltenberg, said allies would continue to supply Ukraine with heavy weapons and long-range systems, with an agreement on a new package of assistance to Kyiv expected at the summit in Madrid later this month. The agreement will help Ukraine move from old Soviet-era weaponry to “more modern Nato standard” gear, he said. Stoltenberg was speaking before a meeting in Brussels of defence ministers from Nato and other countries to discuss and coordinate help for Ukraine.

-US defence secretary, Lloyd Austin, said Ukraine was facing a “pivotal moment on the battlefield” in Sievierodonetsk, with Russian forces using long-range weapons to try to overwhelm Ukrainian positions. Austin urged America and its allies not to “let up and lose steam” and to “intensify our shared commitment to Ukraine’s self-defence”.

-The average rate on the popular 30-year fixed mortgage rose 10 basis points to 6.28% Tuesday, according to Mortgage News Daily.

-Wholesale prices rose at a brisk pace in May as inflation pressures mounted on the U.S. economy, the Bureau of Labor Statistics reported Tuesday. The producer price index, a measure of the prices paid to producers of goods and services, rose 0.8% for the month and 10.8% over the past year. The monthly rise was in line with Dow Jones estimates and a doubling of the 0.4% pace in April. Excluding food, energy and trade, so-called core PPI rose 0.5% on the month, slightly below the 0.6% estimate but an increase from the 0.4% reading in the previous month. On a year-over-year basis, the core measure was up 6.8%, matching April’s gain. The two PPI measures remained near their historic highs — 11.5% for headline, and 7.1% for core, both hit in March. The data is significant in that prices at the wholesale level feed through to consumer prices, which are running at their highest levels since December 1981. The consumer price index increased 8.6% annually in May, defying hopes that inflation had peaked in the spring.

-US President Joe Biden on Wednesday chastised the oil industry over soaring fuel prices at the heart of 40-year high inflation, warning of unspecified emergency measures. The letter, sent to seven major oil corporations, was Biden's most direct salvo yet in a campaign to blame the industry for stoking price increases. Average fuel prices are now $5 a gallon for drivers in the United States, up from $3 a year ago, and the spike is reverberating through the entire economy, helping to sink Biden's approval ratings to below 40 percent.

-U.S. Retail Sales Declined in May as Inflation Stings Consumers. Consumers pulled back on car purchases, online shopping, and spent more at gasoline stations

-The Australian Energy Market Operator (AEMO) has suspended the entire national energy market from June 15 at 2:05 p.m. after it was deemed “impossible” to continue operating the spot market while ensuring a reliable energy supply. AEMO Chief Executive Daniel Westerman prefaced the announcement by revealing the market operator had been forced to direct 5,000 megawatts of generation through direction interventions yesterday, roughly 20 percent of total demand. “In the current situation suspending the market is the best way to ensure a reliable supply of electricity for Australian homes and businesses,” he said in a media release. “The situation in recent days has posed challenges to the entire energy industry, and suspending the market would simplify operations during the significant outages across the energy supply chain.” Westerman emphasised that the suspension would be temporary and be reviewed daily for each market region. Once the AEMO is able to resume market operation under normal rules, it will do so “as soon as practical.”

-Chaos in food supply chains continues to worsen as thousands of cattle across Kansas have mysteriously died. Officially, at least 2,000 cattle died of "extreme heat and humidity" amid triple-digit temperatures, however skeptics aren't buying it as viral footage shows hundreds of cows laying upside down. he high-end of estimates comes from Progressive Farmer Senior Editor Victoria Myers, who reports preliminary estimates from feedlot or feed yards that show 10,000 fat cattle across the state have died because of scorching hot weather. "What is known is that leading up to these heartbreaking losses, temperatures in the area were over 100 degrees Fahrenheit, there was humidity, and there was little to no wind to help cool the animals. Temperature readings reported for Ulysses began to exceed the 100-degree mark on June 11. By June 13, the high temperature was reported at 104 degrees, with humidity levels ranging from 18% to 35%. Temperature and humidity levels began to break some on June 14. Just a few days prior to the heat setting in, highs had been in the 80s," Myers said.