As interest rates rise, a series of ‘debt bombs’ are threatening some of the world’s poorest

Summary:

Wages and employment are high — but so is inflation.

Many analysts and forecasters anticipate that a recession will land next year. Yet month after month, data piles up showing solid, if slowing, jobs growth, low unemployment and an expanding economy.

“You don’t get recessions in the U.S. economy until consumer spending slows, businesses respond with cost-control measures and that includes some layoffs,” said Stephen Miran, a co-founder of Amberwave and a former Treasury official. And so far, that hasn’t happened. In fact, layoffs remain below pre-covid levels.

So, if economic indicators are strong, why is the conventional wisdom that a recession is likely next year?

It all comes down to inflation and the Federal Reserve’s response to it. The Fed seems like it’s willing to at least countenance a substantial reversal in the labor market — more layoffs, higher unemployment — if not outright trying to cause one. That’s because the Fed’s overwhelming goal is to lower inflation, and its go-to tool to do that is slowing down the labor market by raising interest rates.

Despite multiple reports showing inflation slowing, including one early this week that showed virtually no inflation in the past month, the Fed remained steadfast on Wednesday that it needed to take further steps still, raising interest rates another half a percent.

“The labor market continues to be out of balance, with demand substantially exceeding the supply of available workers,” Fed Chair Jerome Powell said in a press conference Wednesday. In other words, the Fed thinks wages are still growing too fast for inflation to come down from about 7 percent — what it’s been in the last year — to closer to 2 percent.

And the effects of the Fed’s interest rate hikes may be felt soon across the economy.

“The Fed is saying that even if they don’t get to as high of a terminal rate, there’s still likely to be lagged effects from the tightening already in place,” said Michael Gapen, head of U.S. economics at Bank of America and a former Federal Reserve economist. “I’m listening to what the Fed is saying; they’re saying we want to slow the economy now,” Gapen said. “They’re raising rates to slow down the economy and reverse imbalances in the labor market. Historically when we do that, we end up with some recession 12, 18 or 24 months later.”

Why good news seems like bad news

While aspects of the inflation picture are starting to slow and reverse — and many analysts expect house prices to decrease — the Fed has fixated on the rising costs of services that aren’t housing.

Take, for example, the price of restaurant meals, which have gone up 8.5 percent in the last year, according to the Bureau of Labor Statistics. The largest component of that increased price is labor. Overall employment in the restaurant sector has still not returned to where it was pre-pandemic, meaning that workers who have come back can demand higher wages. With overall wages still rising by about 5 percent on an annual basis, the Fed sees little chance of inflation falling without continued action.

For much of the period between the Great Recession and the covid pandemic, a common complaint was that wages were growing too slowly. Now, according to the Fed, the paychecks of workers in the service industry are spurring on inflation. The Fed argues too that many workers are actually worse off due to the increase in prices eating away what gains they’re getting in wages.

These services, Powell said Wednesday, are “really a function of the labor market,” meaning that whether they rise or fall in price, or how fast they rise in price, depends on whether the wages of the workers providing them go up quickly or slowly.

“There’s an expectation … that the services inflation will not move down so quickly, so that we’ll have to stay at it so that we may have to raise rates higher to get to where we want to go. And that’s really why we are writing down those high rates and why we’re expecting that they’ll have to remain high for a time,” Powell said.

According to economic projections released Wednesday by the Fed, interest rate hikes will likely continue early into next year and that unemployment rate could rise almost a point to 4.6 percent.

“Normal” recessions

Gapen’s team at Bank of America estimates that unemployment could rise as high 5.5 percent, which he noted would still be around the average unemployment of the last quarter century and only a “mild” recession.

“We haven’t had one of these ‘normal business cycle recessions’ in some time,” Gapen said. “‘We’re not calling for a major decline in the economy; we’re not looking at the risk of a financial crisis.” Past recessions have been caused by massive shocks — the financial crisis of 2007-2008 or the arrival of the covid pandemic — while many past business cycles have been dominated by the Fed, Gapen explained: “It would be more akin to some other business cycles of prior decades where Fed put brakes on the economy for a period of time due to high inflation.” In this case, the Fed also has the ability to revive the economy more quickly, by cutting rates. “It doesn’t seem like there are catalysts for a bigger downturn,” Gapen said.

What to look for

The recession, if it comes, probably isn’t happening this year. For a recession to truly kick in, there would have to be a substantial change in economic conditions. This would likely happen with an interplay between declining prospects leading companies to start laying off workers in large numbers and even for smaller businesses to close up shop entirely, Miran said.

“That’s a terrible human cost and a horrible pain inflicted on the economy and lots and lots of households,” Miran explained. This contraction in businesses hiring and increase in layoffs could be sparked, Gapen said, by a downturn in consumption.

But right now, Miran said, “The key to believing that we’re in a recession is that the economy is going to experience large-scale job losses. Generally speaking so far, they haven’t really been widespread. You need much more to be a real recession.”

Source:GRID NEWS

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Justin

On Sept. 11 of last year, the U.S. military passed a little-noticed milestone. For the 21 years before that date, virtually all U.S. service members were issued the Global War on Terrorism Service Medal. From now on, it’s being given only to troops who work directly on a counterterrorism operation for more than 30 days.

That may seem a minor distinction, but what it means is that it’s no longer assumed that any U.S. service member is working in support of a counterterrorism mission — an acknowledgment that with the withdrawal of U.S. troops from Afghanistan, an era in U.S. defense policy has come to an end. The Global War on Terrorism (GWOT, as it was once officially known) is not a thing of the past, but it’s fair to say it’s not the all-consuming priority it was in the two decades that followed the 9/11 attacks.

But of course that doesn’t mean the world is now at peace — or that the U.S. military has pulled back from the global stage. As 2023 begins, there are hundreds of thousands of U.S. forces deployed around the world.

Six months after the last American troops left Afghanistan, the Russian military invaded Ukraine. While U.S. troops weren’t sent into combat as a result, the invasion did prompt an unprecedented military assistance effort that has included the deployment of tens of thousands of additional troops to Europe to shore up NATO’s eastern flank. Meanwhile, U.S. tensions with China, which the Biden administration describes in its national security strategy as “the only competitor with … the intent to reshape the international order,” are also prompting a redistribution of U.S. resources, including troop deployments.

And beyond these high-profile security concerns, there are U.S. troops deployed from Niger to Djibouti to the Philippines, and dozens of other missions that have merited little or no debate in Congress or coverage in the media.

What are those troops doing in all these different parts of the world? The answers help paint a picture of the U.S. global military posture, nearly a quarter-century after the 9/11 attacks. In a new era of global conflict, US troops are deployed in dozens of countries. Where are they — and why?_1

In a new era of global conflict, US troops are deployed in dozens of countries. Where are they — and why?_1

Remnants of the war on terrorism

After the withdrawal of the last troops from Afghanistan, President Joe Biden assured the country that the global fight against terrorist groups would continue.

“We have what’s called over-the-horizon capabilities, which means we can strike terrorists and targets without American boots on the ground — or very few, if needed,” he said.

Almost a year and a half later, we’re starting to get a better idea of what this “over the horizon” counterterrorism war looks like. In some places, it does indeed involve “boots on the ground,” though in far fewer numbers than were seen in the peak years of the Global War on Terrorism.

The U.S. still has some 900 troops in Syria, where they continue to conduct operations targeting the Islamic State (ISIS) in cooperation with Kurdish forces who control much of the northeast of the country. This has been a huge irritant to NATO ally Turkey, which considers those Kurdish forces a terrorist group and has launched repeated military incursions targeting their positions in Syria.

Though the U.S. combat mission in Iraq formally ended in 2021, some 2,500 U.S. troops remain in the country, and U.S. commanders don’t expect that to change for the foreseeable future. Though the troops are there on what the military calls an “advise and assist” mission to help the Iraqi forces fighting ISIS and haven’t led combat operations in years, these American troops and those based in Syria have been frequently targeted by Iran-backed militia groups.

Shortly after taking office, Biden announced an end to U.S. support for the controversial Saudi-led war against the Iran-backed Houthis in Yemen. But the White House said a “small number” of troops are still deployed in Yemen to conduct operations targeting ISIS and the group al-Qaeda in the Arabian Peninsula. According to data from New America, it’s been over a year since these forces carried out a publicly reported drone strike or ground operation.

According to a letter last month from the president to Congress detailing troop deployments around the world, as required by the Vietnam-era War Powers Resolution, 2,755 troops are also deployed to Saudi Arabia to “protect United States forces and interests in the region against hostile action by Iran and Iran-backed groups.” U.S. troops are also providing “military advice and limited information” to the Saudi-led coalition fighting in Yemen, which the White House stresses is a “noncombat” role.

Since the 2021 pullout and Taliban takeover, no U.S. troops have been based in Afghanistan, but according to the White House, American forces “remain postured outside Afghanistan to address threats to the U.S. homeland and U.S. interests that may arise.” These operations included the drone strike last August that killed al-Qaeda leader Ayman al-Zawahiri.

One other often forgotten remnant of the post-9/11 era: Around 1,800 U.S. troops continue to operate the detention facility at Guantánamo Bay, Cuba — now for just 35 remaining detainees.

“I think the picture is largely one of continuity in many respects,” Brian Finucane, a former State Department legal adviser on military issues, now with Crisis Group, told Grid. “You see a lower operation tempo, what you might call GWOT-lite, but continuity in terms of deployments or even some increases in places in Africa.”

Africa: the war’s new frontier

In addition to the missions listed above, U.S. troops are working in a “train and assist” capacity for counterterrorism operations in countries including the Philippines, Lebanon and Jordan. But increasingly, the focus has shifted to Africa.

In May 2022, Biden signed an order to redeploy roughly 500 U.S. troops to Somalia, reversing Donald Trump’s 2020 decision to remove troops from the country. Somalia has been the most active counterterrorism battlefield of the Biden era, according to New America’s tracking data, with 16 drone strikes targeting the militant group al-Shabaab in 2022. U.S. troops are also deployed to neighboring Kenya and Djibouti to support the operations in Somalia.

Meanwhile, according to the White House War Powers notification, U.S. military personnel are deployed to several countries in the Lake Chad Basin and Sahel region, in Western Africa, to “conduct airborne intelligence, surveillance, and reconnaissance operations” to assist counterterrorism operations by local and European militaries. These include 1,001 U.S. troops in Niger, an increase from around 773 when the last report was issued in June. The U.S. operates a drone base in Niger and has increased its cooperation in recent years with the government of what is, by some measures, the world’s poorest country. The U.S. deployment to the country made headlines in 2017, when a joint patrol was ambushed by a local ISIS affiliate, killing four U.S. and four Nigerien troops.

The incident sparked a brief debate over a deployment that most Americans knew nothing about. Even Sen. Lindsey Graham (R-S.C.), a prominent national security hawk who sits on the Armed Services Committee, admitted that he “didn’t know there was a thousand troops in Niger.” Five years later, those troops remain. While the U.S. government has provided few details about current U.S. deployments in other countries in this region, there have been recent American military operations in Cameroon, Chad, Mali and northern Nigeria as well.

All these deployments raise separate questions about the nature of the various missions. For one thing, it’s not clear that local terrorist groups in these countries pose any risk to the U.S. — and therefore whether these missions are in the U.S. national interest. The argument for these missions is that these groups are tied to global networks like ISIS and al-Qaeda and could metastasize into global threats. For now, the U.S. troops have not generally been in direct combat with these groups, except for those instances when the Americans themselves come under attack.

But it’s also the case that in countries such as Somalia, ostensibly “noncombat missions” have morphed into something more ambitious. As one U.S. official put it, discussing the drone base in Niger, so far used just for reconnaissance purposes, “once you have the facility, you want to use it or the host government wants you to use the capabilities on their behalf.”

These aren’t the only concerns. In Burkina Faso and Mali, U.S.-trained officers have been involved in military coups in recent years. In Nigeria, they’ve been accused of serious human rights abuses.

Europe: the new threat

The U.S. has had a large, though steadily declining, troop presence in Europe for decades. Biden took some steps to slow that decline shortly after taking office, halting a Trump order to reduce troop levels in Germany. Then came the Russian invasion of Ukraine.

The U.S. has sent some 20,000 additional troops to Europe since then as part of an effort to bolster NATO’s defenses, assist Ukraine’s war efforts and deter Russia from further aggression. This includes additional deployments to Poland, the Baltic countries and to Romania, where the Army’s 101st Airborne Division is conducting exercises just miles from the Ukrainian border in its first European deployment since World War II.

Despite these increases, the total number of U.S. troops in Europe, around 100,000, is back to only about where it was before cuts made during the Obama administration, and far from Cold War levels, which peaked at 430,000 troops in the late 1950s.

Coming soon: a military pivot to Asia?

The U.S. may have made China the centerpiece of its national security policy and increased the tempos of drills with allies in the region, but the numbers of troops at longtime U.S. bases in Japan and South Korea have stayed fairly static at around 61,000 and 28,000 respectively.

That may change. The Pentagon has recently announced plans to bolster the U.S. military presence in Australia, including air, sea and land forces, all with an eye on China.

The big picture

“The U.S. military’s role is multifaceted, globally. And it’s not always apparent why the U.S. has this number of troops in various place,” Michael Allen, a professor at Boise State University whose work tracks U.S. overseas deployments, told Grid. While the U.S. discloses the number of troops on what it calls “permanent deployments” overseas, reporting on those deployed into combat can be patchy. For much of the Trump administration, to take an extreme example, the U.S. did not even disclose the number of troops deployed to Iraq, Afghanistan and Syria.

Overall, the number of U.S. troops deployed overseas has declined steadily since the Cold War, with an uptick during the post-9/11 years. And no country today has anywhere near the level of American forces seen at the height of the wars in Iraq and Afghanistan — when there were more than 168,000 and 110,000 troops deployed to those countries, respectively.

But it remains a fact that while the “Global War on Terrorism” may no longer be the defining feature of American military deployments, U.S. forces are currently stationed in (and in a few cases, actually fighting in) a remarkable number of countries with little public debate or awareness back home about what exactly they are doing.

Source：GRID NEWS

Risk Warnings and Disclaimers

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Samantha Luan

Bond

A key part of the U.S. yield curve is the most inverted in decades and for hedge funds, enough is enough.

Commodity Futures Trading Commission positioning data show that speculators are placing wagers that the historic gap between 10-year and three-month yields will start to shrink.

This is reflected in two standout figures from the latest CFTC report - the smallest net short three-month 'SOFR' rate futures position in over two years, and the largest 10-year Treasury futures net short position since 2018.

Together, they point to a belief that implied U.S. interest rates in the coming months won't rise much, if at all, and 10-year yields will move higher.

This would help reverse the extraordinary flattening of the 3-month/10-year curve, which last week inverted by as much as 140 basis points, the most since 1981.

Funds Bet Heavily on U.S. Curve Steepeners_1

CFTC speculators cut their net short position in three-month Secured Overnight Financing Rate (SOFR) futures to just 9,077 contracts in the week through Jan. 17.

It is the smallest net short since December 2021, and considering that short position exceeded 1 million contracts in early September, it is virtually neutral.

Funds also increased their one-month SOFR net long position to over 67,000 contracts, the largest long since August. Momentum indicators are now the most bullish since late 2020.

Funds Bet Heavily on U.S. Curve Steepeners_2

Hedge funds take positions in short-dated U.S. rates and bonds futures for hedging purposes, so the CFTC data are not reflective of purely directional bets. But they are a pretty good guide.

A short position is essentially a wager that an asset's price will fall, and a long position is a bet it will rise. In bonds and interest rates, yields and implied rates fall when prices rise, and move up when prices fall.

Tactical trade?

Meanwhile, speculators increased their net short 10-year Treasuries futures position by 133,699 contracts, the biggest weekly shift since last October, to 545,000 contracts.

That's the largest collective bet against 10-year bonds - and for higher yields - since October 2018.

From an economic fundamental perspective, however, a steeper yield curve is unlikely to be driven by a higher 10-year yield, at least if the incoming U.S. economic data is any guide.

Services and manufacturing sector purchasing managers data, regional manufacturing indexes, and barometers of consumer sentiment are all at levels typically associated with past recessions.

Funds Bet Heavily on U.S. Curve Steepeners_3

Longer-dated borrowing costs have plunged far below short-term yields, a sign investors are expecting growth and inflation to weaken so much that the Federal Reserve will ultimately have to ease policy.

From a tactical perspective, however, it makes more sense. Traders may be taking some of the froth out of the tightening priced into the next few Fed meetings, and may also be thinking that the curve, like a stretched rubber band, must surely snap back.

The starkest example lately is the 3-month/10-year yield curve, which has flattened at lightening pace - as recently as October the curve had a positive slope, and in May last year it was almost 230 bps positive.

Fed officials - including Vice Chair Lael Brainard and Governor Christopher Waller, two of the most influential policymakers after Chair Jerome Powell - continue to make the case for further rate hikes, albeit at a slower pace.

There is no indication that rate cuts are in the Fed's 2023 script, yet 'SOFR' futures continue to price in around 50 bps of easing this year.

Many analysts reckon the flattening bias will remain dominant this year. Hedge funds may fundamentally agree, but right now they are betting on at least a short-term bout of steepening.

Source: U.S. News

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Michelle

What is it all for?

Maksym Zhorin, former commander of Ukraine’s Azov Regiment, told Grid that he believes Russia’s “military goal is to create conditions for further advancement. They still expect to reach the borders of the Donetsk region. But if the battle for Bakhmut began with such goals, over time it became just a dull meat grinder, in which as many people as possible should die on both sides.”

Bakhmut lies on a strategically important highway and near some important rail links, and taking the city could set up Russian forces for assaults on larger nearby towns in Donetsk like Slovyansk and Kramatorsk.

“It’s got some significance, but there are about 20 towns of that size that the Russians would need to take to control the Donbas,” Jeffrey Edmonds, a former Russia director for the White House National Security Council now at the Center for Naval Analyses, told Grid. “It’s not some magical point.”

In Ukraine, the city has taken on enormous political significance. “Hold Bakhmut!” has become a national rallying cry, and Zelenskyy made a point of visiting the front lines in the city immediately before his trip to Washington in December.

But the commander of Ukraine’s land forces, Col. Gen. Oleksandr Syrsky, also said in a television interview in December, “From the military standpoint, Bakhmut doesn’t have strategic significance.”

That may be an effort by the Ukrainians to downplay the importance of a potential setback, but at least some voices in Russia view Bakhmut the same way. Igor Girkin, the former FSB officer also known as Strelkov, who helped launch the original war in the Donbas in 2014 and has emerged as one of the most prominent hawks criticizing the Russian war effort, called the amount of resources being devoted to Bakhmut “idiotic,” noting that if the city falls, Ukrainian forces will likely just fall back to other positions nearby. “It’s chewing through the enemy’s defenses according to the World War I model,” he lamented in a recent video, in which he called for a revamping of Russia’s offensive strategy.

For Ukrainians, there’s a grim calculation behind the defense of Bakhmut. Even if the city itself isn’t that important, it’s worth defending simply because the resources the Russians are pouring into the battle. As U.S. analysts Michael Kofman and Rob Lee argued in a recent paper, the “successes” of the Russian advance in the Donbas in the spring and summer, which required enormous expenditures of manpower and ammunition, left Russian lines exhausted and vulnerable, setting up the successful counteroffensives in Kharkiv and Kherson in the fall.

The Russian strategy of raining artillery on Bakhmut for months, turning the city into rubble, may be similarly draining. U.S. and Ukrainian officials say the Russian rate of daily fire has fallen across Ukraine about 75 percent from its wartime high. The more shells and men Russia sends into Bakhmut, the less it will have available for a potential new offensive in the spring. But of course, Ukraine is bleeding troops and resources in Bakhmut as well.

For the Russians, the terrible grind in Bakhmut may be partly motivated by a sunk-cost fallacy: Having poured so much into the battle already, losing is not an option; they need something to show for it. It’s also politically vital for the Kremlin to show some success after the setbacks in Kherson and Kharkiv. And it’s particularly vital for the man who’s taken on Bakhmut as his personal project.

Chef on the hot seat

U.S. officials have recently suggested that Wagner Group boss Prigozhin may be so intent on taking Bakhmut because of the salt and gypsum mines that surround the city. This would be in character for Prigozhin, who is believed to have traded Wagner’s security services for mining concessions in several countries in Africa on the Kremlin‘s behalf. But it’s also likely he has more than salt on the mind.

Nicknamed “Putin’s chef” for his roots in the catering business, Prigozhin has stepped out of the shadows since the war began to become a popular and influential political figure in his own right. In the process, he has often publicly criticized the Russian military and its leaders, demanding the replacement of senior generals. It’s widely believed that a power struggle in the Kremlin has developed between a faction led by Defense Minister Sergei Shoigu and military chief of staff Valeriy Gerasimov, and another led by Prigozhin and Sergei Surovikin, the general who, with Prigozhin’s support, was appointed to take charge of forces in Ukraine three months ago.

Bakhmut is an opportunity for Prigozhin’s faction to demonstrate its competence compared with its rivals in the Russian military. Prigozhin has publicly accused the military of hampering Wagner’s efforts to take the city by withholding ammunition supplies. In December, Wagner released a video in which two of its fighters in Bakhmut, wearing masks, unleashed a blistering attack on Gerasimov. “We are fighting the entire Ukrainian army, and where are you? There’s only one word to describe what you are,” they said before using a homophobic slur. Prigozhin publicly supported the fighters in the video.

For the moment, though, Gerasimov may have the upper hand. On Wednesday, Putin handed him direct control over the war in Ukraine, effectively demoting Surovikin. Of course, this may also be something of a poisoned chalice: Gerasimov will be on the hook for future failures. Kremlin analyst Tatiana Stanovaya tweeted on Wednesday that Putin appears to be “wavering between” the two factions in an effort to salvage the foundering war effort. All of this behind-the-scenes maneuvering only makes it more vital for Prigozhin to demonstrate some success in Bakhmut.

The road ahead

If Soledar is actually taken by Russia — and again, this is still a matter of dispute — it will be a significant turning point in the battle, but not necessarily a decisive one. The Institute for the Study of War (ISW), a Washington-based think tank, assessed on Thursday that taking Soledear “will not enable Russian forces to exert control over critical Ukrainian ground lines of communication into Bakhmut nor better position Russian forces to encircle the city in the short term.”

The ISW has predicted that the Russian effort in Bakhmut may soon reach this “culmination,” meaning an inability to continue major combat operations. But smaller-scale attacks on the city may continue. As with much else in the war, it could come down to which size can maintain its stocks of ammunition the longest. The loss of life, sadly, may be less of an issue.

As CNA’s Edmonds told Grid, “If it’s a game of just throwing people at the Ukrainians, I think the Russians are prepared to do that for quite some time.”

Source：GRID

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Justin

For the past five months, the fighting around one small city in eastern Ukraine has resembled scenes from World War I: a place where soldiers are fighting from old-style trenches, where waves of soldiers make often-fatal charges over open land — and where gains are counted in tiny patches of territory.

The small city is Bakhmut. And as the overall war grinds on, Bakhmut isn’t just a particularly violent battleground. It’s also the most important contest of the war.

Bakhmut’s importance has risen since November, when Ukraine retook the southern city of Kherson and the onset of winter slowed the pace of fighting elsewhere. This week, Russia claimed to have captured the town of Soledar, an even smaller city less than 10 miles outside Bakhmut. The Ukrainian government claims its troops are still holding out there, but President Volodymyr Zelenskyy acknowledged that the situation in the city is “difficult.”

“And what did Russia want to gain there?” Zelenskyy asked in a televised address. “Everything is completely destroyed, there is almost no life left. And thousands of their people were lost: The whole land near Soledar is covered with the corpses of the occupiers and scars from the strikes. This is what madness looks like.”

Madness or not, a victory in Soledar, prewar population of about 10,000, would mark some of the first progress the Russian war effort has demonstrated in months. The capture of Bakhmut would be an even more significant propaganda victory and likely also a boost to the political standing of Yevgeny Prigozhin, the Kremlin insider whose Wagner Group, a shadowy private military contractor, has been doing the bulk of the fighting there, often publicly clashing with Russia’s regular military in the process.

For Ukraine, the battle has become a symbolic and politically significant struggle, evidence of the country’s willingness to make enormous sacrifices to defend its territory. As Major Oleksii Zakharchenko, a spokesperson for Ukraine’s Territorial Defense Forces, told Grid, “Our army forces will fight for any Ukrainian city, no matter if it is bigger or smaller than Bakhmut. What is Ukrainian, will stay Ukrainian.”

In strategic terms, however, analysts and officials on both sides concede that Bakhmut is of limited strategic value. If it falls, it probably won’t dramatically improve Russian President Vladimir Putin’s chances of achieving his war aims. And holding Bakhmut wouldn’t be a game-changer for Ukraine. All of which raises the question of why so many human lives are being spent fighting over this one small city.

Blood and salt

Bakhmut had a prewar population of around 70,000, which has now shrunk to fewer than 10,000. During the Soviet era, it was known as Artemivsk, after Fyodor Sergeyev, aka “Comrade Artem,” a prominent Bolshevik and ally of Joseph Stalin from Donetsk. The city was renamed in 2016, but the old name is still used in Russia. Before the war, it was known for its sparkling wines and for the salt mines in the surrounding regions. The area also saw heavy fighting during the initial Russian invasion of 2014.

The current battle of Bakhmut began at the beginning of August, after the Russian capture of the nearby cities of Lysychansk and Severodonetsk. Those gains came during the Russian military’s grinding summer offensive to take Donetsk, one of the Ukrainian regions that Moscow has now formally claimed as Russian territory. In the first phase of the fighting, the battle for Bakhmut was waged primarily by the Russian military, but for the last few months, it’s been fought mostly by the Wagner Group, using fighters recruited from Russian prisons, often fighting in poorly organized waves and suffering heavy casualties. One Ukrainian soldier told the Kyiv Independent, “Sometimes we can hear Wagner commanders talk on communications: ‘Run to the Ukrainian trenches, and whoever makes it — you know what to do.’”

The exact casualty tolls on the two sides are unknown. A U.S. official quoted by Reuters estimated last week that out of Wagner’s force of 50,000 mercenaries, 4,100 had been killed and 10,000 wounded, many of them in fighting around Bakhmut. A top Ukrainian military officer claimed in December that between 50 and 100 Russian troops were dying every day in the Bakhmut battle.

Ukrainian casualties have been high as well. In November, the New York Times reported on one Ukrainian military hospital — the only one in the region — that had treated 240 injured troops in a single day. According to Britain’s ministry of defense, Ukraine has committed “significant reinforcements” to Bakhmut in the past two weeks after suffering high casualties.

Accounts of the fighting itself sound alternately antiquated and futuristic. On the one hand, there are waves of Russian infantry charging over a no man’s land of artillery craters into waiting machine gun nests, like something out of the Western Front in 1916. On the other hand, a Ukrainian artillery spotter sits in an office behind the front lines, directing fire on Bakhmut from an iPad connected to a fleet of drones. Why does Bakhmut matter? The brutal, monthslong fight for a small city in Ukraine（1）_1

Why does Bakhmut matter? The brutal, monthslong fight for a small city in Ukraine（1）_1

Source：GRID

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Devin

Central Bank

The European Central Bank will be more aggressive than previously thought in its tightening campaign, adding another 50 basis points to its deposit rate on Feb. 2, as it continues its battle against rampant inflation, a Reuters poll found.

Although the euro zone's central bank has been raising rates at its fastest pace on record it has so far failed to bring inflation anywhere near its 2% target. Prices rose 9.2% in December on a year earlier, official data showed last week.

ECB President Christine Lagarde and her Governing Council will take the deposit rate to 2.50% on Feb. 2, said 55 of 59 economists in the Jan. 13-20 poll. They are likely to follow that up with another 50 basis point lift in March.

The central bank will then add 25 basis points next quarter before pausing, giving a terminal rate in the current cycle of 3.25%, its highest since late 2008. In December's poll, the rate was put at 2.50% at end-March and was seen topping out at 2.75%.

European Central Bank to Raise Deposit Rate to 3.25% by Mid-Year_1

Asked how the risks were skewed to their terminal deposit rate forecasts, over two-thirds of respondents, 23 of 33, said it was more likely it ends higher rather than lower than they currently expect.

"The risk is they will actually be as aggressive as they have claimed. Lagarde and others have said they are in for the long haul where we are going to raise rates meeting by meeting in 2023," said Silke Tober at the Macroeconomic Policy Institute (IMK).

"It's a very clear risk but I happen to think it would be a mistake."

The refinancing rate was expected to rise 50 basis points to 3.00% next week and reach a peak of 3.50% in March.

The U.S. Federal Reserve, which began raising rates many months before the ECB, is forecast to end its tightening cycle after a 25 basis point hike at each of its next two policy meetings. It is then expected to hold rates steady for at least the rest of the year, according to a recent Reuters poll.

Growth Upgrade

Inflation has already peaked in the 20-nation EU, the poll found, and will drift down, but was not seen at the ECB's target until at least 2025. Inflation will average 6.0% this year and 2.5% next but will be 2.0% across 2025.

A mild winter so far, falling gas prices and recent positive economic data meant some quarterly growth forecasts were upgraded in the latest poll from a December survey.

Although a technical recession was still predicted - with a 0.2% contraction last quarter and 0.3% in the current one - the economy was now expected to grow 0.1% next quarter rather than flatline. It is forecast to expand 0.3% in the following two quarters, unchanged medians showed.

All but one of the 36 economists who responded to another question said the bloc's downturn was more likely to be shallower than they expect rather than deeper.

"Not only has the risk of severe, energy-driven recessions diminished markedly but the direction of travel of leading indicators, including our PMI data, signals a rising likelihood of an earlier pick-up in growth than expected," said Ken Wattret at S&P Global.

Across this year growth was pegged at 0.1%, a turnaround from the 0.1% contraction forecast last month. In 2024 it was expected to grow 1.3%, unchanged from December's prediction.

Source: Reuters

Risk Warnings and Disclaimers

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Glendon

The economic news is likely to deteriorate. Europe and the UK are probably in recession, and a mild recession at least seems likely for the United States given the extent of monetary tightening. It’s unclear when China can fully escape zero-tolerance Covid-19 lockdowns and the property-market implosion. The exception as always is Japan, which hasn’t had monetary tightening and where the inflation spike offers the opportunity to break nearly three decades of deflationary psychology.

Markets, of course, are forward looking and usually price in bad economic outcomes ahead of time. It’s possible that we’ve already seen the worst declines in equity markets. This may be the case if the U.S. has only a mild recession in 2023. On the other hand, markets may transition from the current ‘bad news is good’ narrative that sees soft economic data as heralding a U.S. Federal Reserve (Fed) pivot, to a ‘bad news is bad’ scenario wherein fears of significant contraction in profits and jobs lead to further market downturns.

The main issue for 2023 is whether inflation pressures ease sufficiently to allow central banks to step away from rate hikes and potentially begin easing. We expect inflation will be on a downward trend as global demand slows. This should allow central banks to eventually change direction and may set the scene for the next economic upswing. Markets and economies move in cycles. There is no certainty that we have passed the worst of market conditions, but the contours of the next upswing are visible on the horizon.

United States

Inflation remains the dominant issue for U.S. markets. It pressures the Federal Reserve to prioritize price stability over the economic expansion which, in turn, casts a cloud over the outlook for corporate profits and asset prices. The duration and magnitude of the inflation overshoot has already pushed monetary policy into the danger zone. We now believe the likeliest scenario is for a U.S. recession over the next 12 months.

The good news is that private sector balance sheets are healthy, inflation expectations are more anchored than they were in the 1970s and healing global supply chains should allow volatile inflation drivers—such as durable goods inflation—to flip back toward secular deflation. These factors argue against expecting a severe economic contraction. The labour market is still overheated and correcting that imbalance will likely require some pain, such as higher unemployment as the economy cools.

Markets have partially priced in these risks, while pessimistic investor psychology argues against an overly conservative asset allocation. The equity market outlook is mixed with a tug of war between negative cyclical dynamics and oversold sentiment. U.S. Treasuries, however, look like an attractive investment, offering investors positive real yields into an economic slowdown.

Eurozone

The eurozone outlook has improved marginally, although a recession still seems unavoidable. The improvements come from the success in filling gas storage ahead of the winter, the mild weather so far and the energy savings measures implemented within the industrial sector. It now seems that energy rationing will not be required and the previous fears of forced shutdowns of energy-intensive industries should not occur. The test will come when the weather worsens and households turn up their heating, but so far, the worst fears of the energy shock are not being realized.

Eurozone inflation in October reached 10.6% in headline terms, and 5.0% excluding food and energy. It should fall during 2023 as the region’s economy weakens, potentially moving toward 2% by the end of the year. This outlook depends on energy prices stabilizing. Another surge in gas prices next year would see inflation remain high and the region in an extended recession.

More European Central Bank (ECB) tightening seems likely given the labour market pressures: the unemployment rate, at 6.6%, is the lowest since the launch of the common currency. The market expects the ECB deposit rate will peak at 2.75-3.0% by the second quarter. This seems at the upper limit of what the ECB can do given the recessionary outlook. European growth, however, should rebound in the spring. Inflation should be on a downward trend, and this should limit the amount of ECB tightening

United Kingdom

The UK seems set for a prolonged recession, as monetary tightening, fiscal tightening, the energy price shock, and supply-side constraints from Brexit combine to create a challenging outlook. GDP has yet to regain pre-COVID-19 lockdown levels, but labor-supply shortages have driven the unemployment rate to the lowest level since 1973.

New prime minister Rishi Sunak has reversed the tax cuts introduced by the short-lived Truss government and added on some tax increases. This has calmed the gilts market and reduced the pressure on mortgage rates. Markets expect the Bank of England (BOE) to lift the base rate from 3% currently to 4.5% by the second quarter of next year, as wage pressures prevent inflation from falling quickly. It’s questionable whether the BOE will be able to lift rates by this much given the direction of the economy. The BOE’s inflation vigilance, however, makes it difficult to forecast a UK recovery in 2023.

Japan

Japan is set for a year of softer economic growth in 2023. Domestic demand is weakening and there is slowing demand for Japanese exports. Unlike the rest of the world, Japan is still operating below capacity. This means it doesn’t face the risk of monetary overtightening.

Although inflation has been rising, most of it is driven by imported inflation. Japan is an energy importer and the depreciation in the currency this year has pushed up import prices.

Japan has been an outlier in developed markets this year, with the Bank of Japan (BoJ) holding steady with accommodative monetary policy. We expect monetary policy to remain unchanged until BoJ Governor Haruhiko Kuroda’s term ends in March 2023. Any adjustment in policy after that should be marginal. A growth tailwind for Japan could be a revival of the tourism sector following the depreciation in the currency and the recently reopened borders.

Japanese equites appear slightly more expensive than European and UK equities. The Japanese yen is very cheap and should benefit as global central banks reach the end of the hiking cycle and global growth starts to slow.

China

2023 should see the Chinese economy eventually exit zero-COVID government rules, after having spent most of 2022 under intense restrictions. Recent government announcements show that plans to ease restrictions are beginning to be made, but zero-COVID measures are likely to remain in place throughout winter.

A key watchpoint for 2023 is the struggling property market. The government has announced new support measures, but they do not appear large enough to create a sustained recovery. We expect more measures to improve confidence in the housing sector and to boost spending when the economy re-opens. Retail sales are running well below previous trends, driven by the zero-COVID policy and by low consumer confidence.

Attention should also be paid to any further government announcements around investment in semiconductors following the actions by the U.S. government to limit the export of chips to China.

Canada

The Canadian economy performed better than expected in 2022, but a recession seems unavoidable in 2023. The lagged effects of very tight monetary policy should soon catch up with overindebted households. Moreover, a slowing global economy will be a drag on commodity prices, challenging exports.

Although inflation has peaked, a Bank of Canada (BoC) pivot requires a discernable decline in inflation toward the upper end of its 1% to 3% range. Otherwise, policy will continue to tighten despite the slowing economy. That said, BoC Governor Tiff Macklem has indicated that the rate hiking cycle is closer to the end stages, and we believe the BoC will pause after another 50 basis points of tightening. This will take the target rate to 4.25% in early 2023. Eventually, a recession coupled with lower inflation will allow the BoC to ease policy in late 2023.

Financial markets are likely to stay volatile. The positives for investors are that bond yields are more attractive than they've been in over a decade. The Canadian benchmark bond index is yielding over 4%, the highest level since late 2008. This offers improved income and provides diversification protection for recession-driven risk-off sentiment. Canadian equities are vulnerable to a cyclical downturn, although valuations are not extreme, and medium-term prospects are supported by the supply and demand dynamics for natural resources being driven by the energy transition to low carbon sources.

Australia/New Zealand

Australia’s economy is set to slow in 2023 as the Reserve Bank of Australia (RBA) rate hikes take effect and the reopening impulse fades. Electricity prices are expected to increase by up to 80%, which will weigh on consumer spending. Inflation has likely peaked and should allow the RBA to go on pause ahead of other major central banks. We think the market expectation of nearly a 4% peak for the RBA cash rate is too aggressive. A peak between 3 and 3.5% seems more likely. A less-aggressive central bank means there is a lower risk of recession in Australia than in Europe or the United States. Australian equities are no longer trading at a discount to global equities, so the better economic outlook has, to an extent, been priced in. The Australian dollar should benefit from improving activity in China and global central banks approaching the end of their hiking cycle.

The outlook for New Zealand is more precarious than for Australia, given the aggressive rate hikes from the Reserve Bank of New Zealand (RBNZ). Housing has already suffered a significant decline, and this is likely to continue through the first half of 2023. The market expects the RBNZ cash rate to peak near 5.5%, which means over another 100 basis points of tightening. Construction activity should be supported, however, through demand from the Homes and Communities government department. New Zealand is likely to hold a general election sometime in 2023, with the election due by no later than Jan. 13, 2024. Published opinion polls point to a tight contest between the Labour Party led by Jacinta Ardern and the center-right National Party.