Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The stock market is betting on a Goldilocks scenario. Jerome Powell doesn’t foresee a recession, instead he forecasts a soft landing. Apollo is bettering the soft landing scenario with an optimistic “no-landing.” Regardless of which description you choose, all three are bets that a recession will not occur.

Assuming the markets, Apollo, and Powell are right, stocks may have already bottomed with a new high not too far away. Accordingly, investors buying into a soft or no landing should ignore numerous recession warnings and load up on stocks.

However, suppose the soft landing crowd is wrong and recession warnings, such as the yield curve and most national and regional manufacturing surveys, prove prescient, as they reliably have. In that case, 2023 may be a rough year for the stockholders.

While a soft landing may be good for stocks, recessions and stock prices are not the best of bedmates. Therefore to better appreciate what a recession is and how we can better track the odds of a recession, we lean on the arbiter of recessions, the National Bureau of Economic Research (NBER).

Recession Rule of Thumb

Before discussing the NBER, it is worth looking back a year. In 2021, real GDP declined in the first and second quarters. Quite a few economists and investors following a popular recession rule of thumb, declared the economy was in a recession. The recession rule of thumb states that two consecutive quarters of negative real GDP growth constitute a recession. Investors shying away from stocks because of that rule of thumb may have missed an 18% gain in the year’s first six months.

The official determiner of recessions, the NBER, does not consider two consecutive quarters of negative growth a recession. We will discuss their approach shortly.

The graph below compares NBER declared recessions to the two consecutive negative quarters rule of thumb. As we see to the right, the rule of thumb-2022 recession was never an official NBER recession. Further, the rule of thumb didn’t see the recession in 2001 or 1961. In 1970 it was slightly early in calling a recession, and it was late in 2008, 1990, and a few other instances.

Getting a recession forecast right and early is essential. As shown below, stocks tend to decline three to six months before a recession starts. Being late on a recession call or failing to forecast a recession can prove costly.  

NBER Cycle Dating

The NBER provides a succinct summary of how they determine whether the economy is in a recession. Per Business Cycle Dating, the NBER considers a recession a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”

The definition is vague, given the massive amount of economic data they parse to assess the economy. However, there is a shortcut we can model to help predict when the NBER will make its recession call.

The first hint to finding this shortcut is the graph pasted at the top of the NBER’s aforementioned article.

The NBER chose to graph unemployment and place it just below the article’s headline. The clear intention is to show the strong correlation between higher unemployment rates and recessionary periods.

Employment and Wages Matter Most

The second hint is in the following paragraph:

The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production.

This paragraph provides a rundown of what they consider the most critical factors to determine the state of economic activity. Three of the six indicators are based on wages and employment. Another, real personal consumption expenditures, heavily depend on employment and wages.

Reading on, the NBER seemingly provides the secret formula as follows:

In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.

NBER Modelling

Armed with the two data points the NBER considers most valuable, we created an NBER recession model. The model helps us ascertain if we are or are not in a recession, but more importantly, if the economy is trending toward one.

Before sharing our model, we review the two measures on which the NBER puts the most weight.

Real Personal Income Less Transfers is the total amount of personal income adjusted for inflation, less any income from government subsidies and benefits. Government transfers include Social Security, Medicare & Medicaid, unemployment assistance, special covid benefits, and many other items.

As we show, real personal income less transfers tend to decline during recessions, but it has also dropped outside of recessions on multiple occasions. It is not a perfect indicator.

Nonfarm Payroll Employment measures the number of employees excluding farm workers and a few other job classifications. The graph below shows that negative employment growth for two quarters or more coincides with NBER recessions. A few negative readings did not correspond with recessions, but they all happened shortly after a recession.

With the two measures the NBER puts “the most weight on” we created a model that has proven to be accurate and relatively timely.

NBER Proxy Model

The graph below compares the proxy model recession indicator in orange to the NBER recessions. The indicator is often accurate within three months. Only once, in 2007, did it provide an early warning. However, it produces false signals during the recovery period following a recession.

The indicator is the light blue line. The dotted one-year moving average helps see the recent trend. As it shows, a recession is not imminent. The movement has generally been declining toward recession, but it resides at levels in line with economic expansion over the last decade.

Understanding the two pieces allows us to use this proxy model and, more importantly, follow employment, income, and inflation to provide potential early warnings that a recession may occur soon.

Staying Ahead of our Model

Now that we know two crucial recession indicators, we must ask how else we can stay ahead of a recession. The obvious answer is to understand when incomes and employment will decline.  

The ISM Manufacturing Index has an excellent track record of signaling recessions. Furthermore, as shown below, it tends to lead employment by about nine months.

The graph above shows that every time ISM has fallen below 45, employment has declined on a quarterly basis. The following chart shows that nine of the last ten recessions were accompanied by ISM below 45. The only time such did not occur was in 2020.

Given the unprecedented and immediate impact of covid, it’s not surprising a survey of manufacturing executives did not foresee trouble. That said, it was in decline and possibly heading for 45, even if the pandemic never occurred.

ISM is currently at 47.4 and in economic contraction territory. It has been trending lower for over a year, albeit from very high levels. The trend and recent readings warn that a sub-45 level may not be that far off.

NBER Lags

The model we created above can lag the NBER by a few months. While that may seem like a risk, understand that the NBER waits nine to twelve months for revised economic data before ruling a recession. Therefore, while the model may be a little late, it will still be early compared to the NBER. Further, we can use tools like ISM and other leading indicators to help stay ahead of income and employment trends.

Summary

This model is just one of many tools we use to help guide our investments. It is not perfect, but it provides more than a rule of thumb that has previously hoodwinked investors.

US futures dipped after Tuesday’s furious last hour reversal rally sparked by Powell’s “disinflation” commentary which refrained from pushing back against investor optimism, even as stocks in Europe and Asia were still buoyant, with the FTSE 100 posting a new record high. S&P 500 eminis slipped 0.4% at 7:45 a.m. while Nasdaq futures were 0.2% lower. The underlying benchmarks jumped 1.3% and 2.1%, respectively, in the latest session as investors brushed off Fed chief Jerome Powell’s comments that borrowing costs may need to peak higher than previously expected, choosing to focus instead on his outlook that 2023 will be a year of significant declines in inflation. The dollar slid,  Treasuries reversed some of Tuesday’s losses, and an index of commodities rose a second day.

In premarket trading, Chipotle dropped after its results missed estimates. Microsoft gained, with its market value poised to breach $2 trillion, as analysts raised price targets after it unveiled plans to use artificial intelligence tools to improve online search and browsing. Fortinet soared after the cybersecurity company gave a better-than-expected revenue forecast for 2023. Meanwhile, VF Corp. edged higher as it delivered some positives in its fiscal third-quarter earnings, though analysts say these are masking some weaker areas and a tough outlook for the Vans and North Face owner. Oak Street Health rose 30% to $33.68 after CVS agreed to acquire the elder-care provider for deal an enterprise value of about $10.6 billion. Alibaba surged premarket on news it too was developing a Chat GPT-like robot and currently conducting internal testing on the AI-tool. Here are some other notable premarket movers:

• Prudential Financial (PRU US) shares decline 3.1% with analysts saying the insurer’s results missed expectations and citing ongoing concerns about the slowing pace at which it is returning capital.
• Lumen Technologies (LUMN US) shares fall 13% with analysts seeing a difficult year of transition ahead for the fiber network provider after its Ebitda forecasts missed estimates.
• Fortinet (FTNT US) rose 12% after the cybersecurity company gave a better-than-expected revenue forecast for 2023. Analysts noted that demand for its cyber security products remained resilient even as businesses clamp down on IT budgets.
• NetEase (NTES US) rises 1.9% and its online education arm Youdao (DAO US) surges 22% in US premarket trading, after Youdao says it’s planning to roll out a demo product similar to ChatGPT soon.
• Keep an eye on American Express (AXP US) as Morgan Stanley upgraded the shares to overweight from equal-weight as its consumer-finance analysts shift stock picks toward higher credit quality, sustainable revenue growth and positive operating leverage.
• Watch United Rentals (URI US) as it was initiated with an outperform rating and $544 price target at Credit Suisse, which sees a strong outlook underpinned by a robust business model for the equipment-rental group.
• Airline stocks may be in focus as Redburn turns more bullish on international airlines than domestic, despite expectations of compressed industry margins as costs rise. Becomes “more positive” on US network carriers given their discounted valuations.

US stocks extended their 2023 rally as traders turn more optimistic about the path of the economy and expect a Fed pivot soon. The rally has been boosted by the stubborn pessimism of noted sellside strategists such as JPM’s Marko Kolanovic, Goldman’s David J. Kostin and Morgan Stanley’s Mike Wilson who have been skeptical of the rally for the last 400 points and are warning of limited upside. At some point they will be right. The outperformance of tech stocks, specifically, is at risk as the Nasdaq 100 Index approaches a bull market and earnings estimates trend lower, with valuations swelling to expensive levels compared with real bond yields.

“I think we need to be careful with how we interpret the market rally we have been seeing,” said Madison Faller, global strategist at JPMorgan Private Bank. “To me it’s not a rally based upon incrementally dovish messaging — I think it’s actually more so that Powell’s message wasn’t incrementally hawkish,” she said in a Bloomberg TV interview. “In the short term, markets are perhaps running a little ahead of themselves in the sense that valuations are starting to look a little stretched.”

During his SOTU speech last night, Joe Biden said he is announcing new standards to require all construction materials used in federal infrastructure projects to be made in America and said the tax system is unfair, while he called for Congress to pass a minimum billionaire tax and proposed to quadruple the tax on corporate stock buybacks. Biden noted he is committed to working with China where it can advance American interests and benefit the world but if China threatens US sovereignty, the US will act to protect the country and also said the US is in the strongest position in decades to compete.

“Another hawkish speech goes unheard,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said of Powell’s comments. “Investors focused on the fact that he appeared just as hawkish as he has always been, that he didn’t promise a 50bp hike at next meeting, and that he said that the Fed won’t actively shrink its balance sheet for at least a few years.”

European stocks rose to their highest level since April, tracking Tuesday’s rally on Wall Street as investors welcomed a balanced tone from Fed Chair Powell. The Stoxx 600 rose 0.8% as corporate earnings also provide support after positive updates from Equinor ASA, Akzo Nobel N.V and ABN AMRO Bank N.V. S&P and Nasdaq futures are both down 0.4%. Here are some of the most notable premarket movers:

• ABN Amro shares rise as much as 6.1% after reporting 4Q results ahead of expectations. Analysts said it appears to be a high- quality beat for the Dutch bank
• Equinor shares rise as much as 7.3% in early trading, the most in 11 months. The Norwegian energy group’s results are a beat and its shareholder returns appear to be well ahead of what was expected, analysts say
• Pandora shares rise as much as 9.2% as the jewelry retailer’s quarterly earnings, organic growth and payouts topped estimates, analysts say
• Tate & Lyle shares rise as much as 3% after the company announced stronger-than-expected 2028 performance targets in an update ahead of its capital markets event
• Neste shares rise as much as 13%, the most since early March, after the refiner reported 4Q results that RBC said were “strong” amid higher-than-expected renewable products sales margin
• Vestas shares gained as much as 3.7% after the world’s largest producer of wind turbines reported results that Jefferies said signaled the Danish company is “slowly turning the corner”
• Maersk falls as much as 5.7% before paring losses after the shipping giant’s full-year forecast falls short of estimates, which Citi says will likely drive downgrades in consensus expectations
• Societe Generale shares dropped as much as 2.7%, before paring losses, as its shareholder payout fell short of a previously pledged target even as quarterly profit beat estimates
• Volkswagen falls as much as 2.7% to lead declines on the Stoxx 600 Automobiles & Parts Index on Wednesday after the German carmaker’s preliminary results showed cash flow below its target amid supply-chain and logistics disruptions
• Handelsbanken shares fall as much as 6.9% after mixed results from the Swedish bank that failed to impress following stronger numbers from peers
• TotalEnergies shares decline as much as 3% after the company published 4Q report that RBC viewed as neutral, and “broadly in line” with market expectations

Asian stocks edged higher as traders parsed comments by Federal Reserve Chair Jerome Powell that were seen as dovish, even after he reiterated that further interest rate hikes are needed to curb rising inflation. The MSCI Asia Pacific Index gained as much as 0.6%, driven by rate-sensitive technology shares. Benchmarks in Taiwan and South Korea advanced, while Japanese, Hong Kong and Chinese shares fluctuated. The Fed chair’s remarks at the Economic Club of Washington offered traders some relief, who were bracing for a more hawkish recalibration of rate expectations. While interest rates in the US will likely continue to rise, “in Asia, China’s recovery and reopening has just happened recently,” Ken Peng, head of Asia Pacific investment strategy at Citi Global Wealth Investments, said in a Bloomberg TV interview. “That momentum is there, it’s fairly strong.” Still, the stellar rally in Chinese shares over the past three months has stalled as traders take profit and await fresh catalysts. Meituan led Chinese technology stocks lower Wednesday after a report that short-form video service Douyin would make forays into the food-delivery business.

Japanese stocks fell, with investors assessing disappointing tech earnings and as the yen continued to strengthen.  The Nikkei 225 declined 0.3% to 27,606.46 as of the market close in Tokyo, while the Topix Index was little changed at 1,983.97. Among the 2,163 stocks in the Topix, 1,138 rose, 886 fell and 139 were unchanged.  SoftBank Group shares tumbled 5.1% after the company reported further steep losses in the latest quarter and CEO Masayoshi Son skipped the results call.  Nintendo shares slid 7.5% after the electronics maker missed quarterly profit estimates and trimmed its full-year outlook as sales of its Switch game console missed targets. “The yen’s appreciation is offsetting the positive impact of higher U.S. stock prices,” said Tomo Kinoshita, global markets strategist at Invesco. “Earnings are also having a strong impact on the market, as the results seem to confirm that inventory and production adjustments are not completed yet.”

In FX, the Bloomberg Dollar Spot Index fell 0.2%, adding to Tuesday’s 0.4% drop, as the greenback weakened against all of its Group- of-10 peers. Scandinavian currencies and the pound were the best performers.

• The euro rose to a day high of $1.0761 but remained within yesterday’s range. Bunds eased and the 2-10-year segment of the yield curve added around 2bps.
• The pound continued to claw back some of the losses from the end of last week and briefly rose above $1.21. The gilt curve twist steepened modestly. The UK’s demand for workers accelerated for the first time in nine months in January, piling pressure on the Bank of England as it tries to tame inflation.
• The Swedish krona rebounded a second day from a 14-year low versus the euro, while mixed data Wednesday could keep demand for straddles elevated in euro-krona ahead of the Riksbank monetary policy decision Thursday. Sweden’s housing market continued to seek a bottom at the start of the year, beset by falling activity after ten months of consecutive price declines

In rates, treasuries are richer across the curve, with gains led by intermediates, steepening the 5s30s spread by 1.5bp on the day and the US 10-year yield down 2bps. US 10-year yields are near middle of day’s range at 3.645% in the early US session, richer by 3bp on the day and outperforming bunds and gilts by 3.5bp and 1bp in the sector Core European markets are underperforming slightly as traders digest the European Central Bank decision Tuesday to introduce a new remuneration ceiling for deposits from May 1. The bund curve bear steepens with 2s10s widening 3.2bps. The US session focus is on the 10-year note auction, following Tuesday’s poor 3-year results. The treasury auction cycle resumes with a $35b 10-year sale at 1 p.m. in New York, and concludes with a $21b 30-year offering on Thursday; they follow a poor 3-year auction on Tuesday, which tailed by 4bp. WI 10-year at 3.625% is 5bp cheaper than January’s stop-out, which traded 0.5bp through the WI level.

Crude futures advance with WTI adding 1.2% to trade near $78.10. Nat gas futures diverge once again while TotalEnergies writes that The tensions on European gas prices seen in 2022 are expected to continue into 2023, as the limited growth in global LNG production is supposed to meet both higher European LNG demand to replace Russian gas received in 2022 and higher Chinese LNG demand. Spot gold rises roughly 0.4% to trade near

Looking to the day ahead now, we’ll hear from several central bank speakers including the Fed’s Williams, Cook, Barr, Bostic, Kashkari and Waller, as well as the ECB’s Knot. Otherwise, data releases include Italian retail sales for December, and earnings releases include Disney and Uber.

Market Snapshot

• S&P 500 futures down 0.3% to 4,164.75
• STOXX Europe 600 up 0.8% to 461.83
• MXAP up 0.6% to 167.43
• MXAPJ up 0.7% to 546.28
• Nikkei down 0.3% to 27,606.46
• Topix little changed at 1,983.97
• Hang Seng Index little changed at 21,283.52
• Shanghai Composite down 0.5% to 3,232.11
• Sensex up 0.6% to 60,663.61
• Australia S&P/ASX 200 up 0.3% to 7,530.07
• Kospi up 1.3% to 2,483.64
• German 10Y yield little changed at 2.38%
• Euro up 0.3% to $1.0755
• Brent Futures up 1.1% to $84.64/bbl
• Gold spot up 0.6% to $1,884.48
• U.S. Dollar Index down 0.35% to 103.06

Top Overnight News from Bloomberg

• High-frequency traders are often singled out as the culprits behind a lack of prices when markets get jumpy. But the activities of these controversial companies have gained a stamp of approval from the UK’s regulator, at least in currency markets
• The BOJ’s negative-rate policy has kept short-term interest rates below zero since 2016, even as global peers shifted to hiking. But it also acts like a tax on yen funds, driving up local demand for foreign currencies to the point that there’s a premium on offer for what’s delivered via the foreign- exchange swap market
• The BOJ Governor Haruhiko Kuroda is in the twilight of his 10-year tenure. His successor inherits a bond market that is larger than ever, but riddled with wild distortions. The lingering question for Japan is how the central bank can normalize policy
• Romania may join Poland and other regional peers this week in holding interest rates steady as policy makers shift attention to risks posed by an economic slowdown even as inflation persists
• China’s successful development shows there is another way to modernize, President Xi Jinping said, rejecting any need to “westernize” and doubling down on his goals of increased self reliance and improved social justice
• China’s rapid reopening is having an unfortunate side effect for banks — a surge in funding costs to levels not seen in two years. A gauge of overnight borrowing costs climbed to the highest since 2021 on Wednesday, even as the People’s Bank of China pumped short-term cash into the financial system
• India’s central bank slowed the pace of interest-rate increases while keeping the door open for further policy tightening to curb core inflation, an approach that aligns with the thinking of peers in the US and Australia. The central bank plans to allow lending and borrowing of government bonds as it seeks to deepen the nation’s $1 trillion debt market
• Emerging-market investors were getting excited about a return to Egypt after last month’s devaluation of the pound. A surprise from the central bank has kept them away
• Turkey President Recep Tayyip Erdogan is working on the assumption general elections will be held in Turkey three months from now despite twin earthquakes devastating much of the southeast this week

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were indecisive and failed to sustain the momentum from Wall St where markets whipsawed as attention centred on Fed Chair Powell before the major US indices eventually closed at session highs as Powell’s two-sided comments proved not to be as hawkish as some feared.  ASX 200 was underpinned by strength in financials and with the mining-related industries benefitting from the rebound in underlying commodity prices. Nikkei 225 underperformed with sentiment in Japan pressured by weak earnings reports from the likes of SoftBank, Sharp and Nintendo. Hang Seng and Shanghai Comp. were indecisive amid lingering tensions from the spy balloon incident and after China denied a US request for a phone call between defence officials.

Top Asian News

• Japan is arranging to relax border control measures for visitors from China as soon as this month and will end blanket testing for all travellers from China upon arrival, but will continue requiring a COVID test before departure from China, according to FNN.
• New Zealand PM Hipkins said policy is to be focused on the cost of living and announced that the minimum wage will increase in line with CPI from April.
• RBI hiked the Repurchase Rate by 25bps to 6.50% as expected through a 4-2 vote (prev. 5-1) and the MPC kept the policy stance of remaining focused on the withdrawal of accommodation through a 4-2 vote (prev. 4-2). RBI Governor Das stated further calibrated monetary policy action is warranted and that the situation remains fluid and uncertain, while he added that the stickiness of core inflation is a matter of concern and they need to see a decisive fall in inflation.
• Beijing has asked students to wear masks at primary and middle schools, according to Bloomberg.
• Japan may opt for milder chip-equipment curbs on China than the US despite agreeing on export curbs, according to a Japanese ruling party lawmaker cited by Reuters.

European bourses are firmer across the board, Euro Stoxx 50 +0.7%, taking advantage of the firmer Wall St. close and shrugging off indecisive APAC trade. Sectors are similarly bid with Energy outperforming given benchmark activity and post-Equinor, though upside is capped by TotalEnergies. Stateside, futures are in modest negative territory paring some of the post-Powell upside ahead of key speakers incl. Fed’s Williams. BIS’ Carstens says a re-think is needed on regulating big tech activities in the financial sector. Adding, it is time to consider tangible operations for direct regulation. Tesla (TSLA) China January deliveries 66.05k, +18% MM, via CPCA; adding, China sold 1.3mln passenger vehicles, -37.9% YY.

Top European News

• NIESR cut 2023 UK GDP growth forecast to 0.2% from 0.7% and 2024 GDP to 1.0% from 1.7%, while it sees CPI averaging 8.3% in 2023 and 4.2% in 2024 vs. prev. forecast of 8.0% and 3.9%, respectively.
• ECB says it will keep capital requirements steady this year. Click here for more detail. ECB’s Enria (supervisory board) says there is no generalised dissatisfaction with internal models, issues with some individual banks. Launched an initiative to simplify internal modes landscape
• Vattenfall Operating Profit Rises Despite Big Trading Loss
• Top Platinum Miner Says Payouts to Decline as Power Outages Hit
• Ukraine Latest: Zelenskiy to Meet Sunak in London on Wednesday
• Banco BPM Drops as Conservative Guidance Clouds Income Beat
• Man United Surges After Daily Mail Report on Qatari Bid Plan

Fixed Income

• EGBs remain underpressure but have lifted off of earlier 135.62 and 104.53 troughs in Bunds and Gilts, perhaps following the morning’s supply which was soft, though not as poor as the US 3yr.
• Stateside, USTs have recuperated somewhat from Tuesday’s pressure ahead of numerous Fed speakers and a USD 35bln 10yr sale; yields are slightly softer with action much more pronounced at the short end.

Commodities

• Crude benchmarks climb higher as Tuesday’s upside continues with multiple supportive factors for the complex; currently, the benchmarks are firmer by over 1.0%.
• Nat gas futures diverge once again while TotalEnergies writes that “The tensions on European gas prices seen in 2022 are expected to continue into 2023, as the limited growth in global LNG production is supposed to meet both higher European LNG demand to replace Russian gas received in 2022 and higher Chinese LNG demand.”.
• US Energy Inventory Data (bbls): Crude -2.2mln (exp. +2.5mln), Gasoline +5.3mln (exp. +1.3mln), Distillate +1.1mln (exp. +0.1mln), Cushing +0.2mln.
• UK’s Unite union announced that a 48-hour strike is underway at BP (BP/ LN) Petrofac installations involving around 80 workers, according to Reuters.
• Iranian official says OPEC is moving in the correct direction, sees oil prices increasing this year to circa. USD 100/bbl in H2 2023; OPEC+ likely to continue existing policy at the next gathering.
• India’s Oil Minister says the OPEC SecGen has invited India to the next OPEC+ meeting.
• Qatar set March Marine Crude OSP at +0.40/bbl vs Oman/Dubai; sets Land crude at +1.10/bbl vs Oman/Dubai, according to a document cited by Reuters; Iraq sets March Basrah Medium crude price to Asia at -1.10/bbl vs Oman/Dubai average; Europe OSP -6.95/bbl vs dated Brent, according to SOMO.
• Activity at Peru’s major copper mines are at or near normal levels in spite of social unrest, according to data reviewed by Reuters; MMG’s Las Bambas mine elevated after last-minute supplies to avert the expected halt, but could still face production halt in the coming days as inputs are running out.
• Spot gold is firmer, though off best levels as the DXY picks up from session lows below 103.00 and as such gold remains circa. USD 15/oz from USD 1900/oz at best.
• LME aluminium lags and eyes USD 2,500/t to the downside following an exceptionally large warehouse build of 105.6k (vs prev. -2k).

FX

• The USD continues to ease post-Powell though the DXY has lifted comfortably above 103.00 after briefly matching Tuesday’s 102.99 trough.
• Amidst this, G10 peers are firmer across the board with GBP outperforming slightly and Cable incrementally above 1.21 courtesy of EUR/GBP action amid slightly tamer action for the single currency.
• AUD is seemingly experiencing a modest second-wind post-RBA and ahead of Friday’s SOMP; AUD/USD tested 0.70 and NZD/USD at the upper-end of 0.6310-0.6348 parameters.
• SEK is relatively contained despite mixed data ahead of the Riksbank while EUR/NOK has tested 11.00 to the downside at best.
• PBoC set USD/CNY mid-point at 6.7752 vs exp. 6.7758 (prev. 6.7967)
• BoC Governor Macklem flagged the debt load in explaining the early rate pause and said that rate hikes have hit homeowners hard, while the BoC needs time to gauge how households and businesses adapt to higher rates before making further moves. Macklem also commented that they cannot put it on a calendar and do not know how long the duration of the rate pause will be, according to Bloomberg.

Geopolitics

• US Pentagon said China declined a US request for a phone call between the Pentagon chief and China’s defence minister, according to Reuters.
• Russia says it is not satisfied with the progress of unblocking Russian exports as part of the Ukrainian grain deal and the EU is not fulfilling its promises on this, via Tass citing a diplomat.
• Russian Deputy PM Novak says Russia will decide countermeasures to the EU sanctions by March 1; Russian oil output in February has been in line with January levels; January production stood at 9.8-9.9mln BPD.
• Russia Foreign Ministry says US demands to restart nuclear arms treaty inspections are cynical because it is assisting Kyiv in striking Russian targets; adds, the US’ actions, in respect to Russia, are fraught with real risk of direct confrontation between the two nuclear states, according to Ria
• UK PM Sunak says he will offer to provide Ukraine with longer-range capabilities. Note, Ukrainian President Zelensky is visiting the UK today and will be meeting with PM Sunak.

US Event Calendar

• 07:00: Feb. MBA Mortgage Applications, prior -9.0%
• 10:00: Dec. Wholesale Trade Sales MoM, est. -0.2%, prior -0.6%
• 10:00: Dec. Wholesale Inventories MoM, est. 0.1%, prior 0.1%

Fed speakers

• 09:15: Fed’s Williams Interviewed at WSJ Live Event
• 09:30: Fed’s Cook Takes Part in a Discussion in Washington
• 10:00: Fed’s Barr and Bostic Speak to Students in Mississippi
• 12:30: Fed’s Kashkari Speaks at Boston Economic Club
• 13:45: Fed’s Waller Discusses the Economic Outlook

DB’s Jim Reid concludes the overnight wrap

Morning from Paris where I’m staying at a hotel I last stayed in 3.5 years ago. All I can say is that the room service menu has soared in price since I was last here. As such after a cancelled dinner and a long day of no food I roamed the back streets of the Arc De Triomphe searching for something suitable. I gambled on a bagel shop. I got it back to my room and it was disgusting. The glamour of international business travel. I have a client breakfast, lunch and dinner today so I’m expecting much better!

Yesterday was all about the wait for Powell’s speech at the Economic Club of Washington, and then the interpretation of it. It’s a bit of a generalisation, and my views were scarred by 2 horrible bagels, but I would say the more the FOMC press conference went on last Wednesday the more dovish Powell sounded. However, last night’s speech was a little bit of the reverse. When all was said and done though, relative to pre-Powell levels terminal didn’t move much, rates moved a bit higher and equities saw an impressive climb (+1.29%). There was a fair bit of vol during the speech with the S&P trading in a wide 1.8pp range, while 10yr Treasuries traded in a 6bps range. The key market theme was that equities seemed to breathe a big sigh of relief that he didn’t choose this moment to notably change the script post payrolls. There was some fear that he would.

To review his comments, Powell continued to repeat last week’s FOMC mantra that further rate hikes were needed in order to rein in inflation and that policy would have to stay tight for some time. While directly addressing last week’s report he said it “shows you why we think this will be a process that takes a significant period of time … the labour market is extraordinarily strong”. He then spent a good deal of time referencing back to his comments from the FOMC press conference. These opening remarks caused the market to initially turn risk on with the S&P up 1.2% and 2yr yields moving -9bps lower after the first 30 minutes of the interview. However, Powell then pointed out that if the labour market remains strong “it may well be the case that we have to do more.” This seemed to signal to markets that a further 50bps of hikes is the floor for fed funds with risks to the upside on labour or inflation data coming out higher than expected. This caused a quick reversal with the S&P 500 dropping nearly -2% and 2yr yields climbing +8bps in the span of a half hour.

However, once Powell had wrapped up, both moves were retraced throughout the rest of the US afternoon with the S&P finishing near the highs of the day, and higher than during the peak of Powell’s interview, at +1.29%. Meanwhile the policy-sensitive 2yr yield sold off with yields finishing flat at 4.46% and 10yr yields +3.4bps higher at 3.67% (although -2.2bps lower this morning in Asia). Even with Powell raising the spectre of a higher terminal rate than the Fed had previously signalled, fed future pricing actually dropped ever so slightly with the July meeting closing at an implied fed funds rate of 5.153%, down 0.05bps. We’ve actually dipped -2.5bps this morning.

Digging into the market reaction more, it was a very risk-on rally with 70% of the S&P 500 higher on the day, with technology the leader once again. Semiconductors (+3.2%), Media (+3.1%), Energy (+3.1%) and Software (+2.6%) were the best performing sectors, while the only laggards were defensives like Telecoms (-1.2%), Household Goods (-0.7%) and Food & Beverage (-0.5%). The VIX volatility index finished near the lows of the day at 18.6pts.

There was also a larger risk on move in commodities with Brent crude oil up +3.33% to $83.69/bbl and WTI up +4.09% to $77.37/bbl following news that Saudi Aramco is increasing the prices of fuel shipments to Asia starting in March on the back of heightened demand. The move took another leg higher following the general risk-on sentiment following Powell’s remarks. The rise in oil and copper (+1.13%) due to China’s reopening meant that the Bloomberg Commodity index (+1.35%) rose by its largest amount since December 13.

Before Powell, markets had extended the hawkish shift seen since payrolls. First, the other central bankers we heard from continued to lean towards further rate hikes, with Minneapolis Fed President Kashkari saying that “right now I’m still at around 5.4%” on where rates needed to go. That would imply the Fed needs to do another 25bp move on top of current market pricing. Separately, Bundesbank President Nagel said that “more significant rate increases will be needed”, and pushed back on an imminent pause in saying that “I don’t see that our work is done with this rate hike in March.”

On top of those remarks, various pieces of data signalled that the battle against inflation was far from over. For instance, Manheim’s index of US used-vehicle prices was up by +2.5% in January, marking its strongest monthly increase since November 2021. Bear in mind that used cars and trucks make up over 4% of core CPI, and we’ve seen 6 consecutive monthly declines in that component, so any reversal there would help push up the overall numbers. Back in Europe, we also had the ECB’s latest Consumer Expectations Survey for December. That showed 12-month expectations for inflation remaining unchanged at 5.0%, and 3yr expectations moved back up a tenth to 3.0%, so still a full point above their target even at a medium-term horizon. And finally on the growth side, the recent strong data in the US saw the Atlanta Fed’s GDPNow tracker increase its Q1 growth estimate to an annualised +2.1%, up from +0.7% previously. A month ago many had a flat or negative quarter pencilled in for Q1.

Ahead of Powell, the more hawkish newsflow had led European sovereigns to lose ground for a 3rd consecutive day, with yields on 10yr bunds (+5.3bps), OATs (+4.7bps) and BTPs (+7.1bps) all moving higher. Those movements accelerated into the close after we heard that the ECB were adjusting the remuneration on government deposits, which would now have a ceiling of the euro short-term rate (€STR) minus 20bps. Previously, it had been whichever was lower of the deposit rate or the €STR. The aim is to encourage an orderly reduction in these deposits, which they said is “in order to minimise the risk of adverse effects on market functioning and ensure the smooth transmission of monetary policy”. Otherwise, European equities were pretty subdued yesterday, with the DAX (-0.16%) and the CAC 40 (-0.07%) posting small losses, whilst the STOXX 600 (+0.23%) saw a modest advance. This was all pre-Powell.

Asian equity markets are mixed overnight. As I type, the KOSPI (+1.39%) is leading gains with the Hang Seng also trading in positive territory. Meanwhile, the Nikkei (-0.43%) is lagging its peers following disappointing quarterly earnings from Nintendo, Softbank and Sharp Corp. Elsewhere, Chinese stocks are muted with the CSI (+0.01%) and the Shanghai Composite (-0.05%) fluctuating between gains and losses.

Outside of Asia, US stock futures are wavering with contracts tied the S&P 500 (-0.03%) fractionally lower and those on the NASDAQ 100 (+0.06%) just above flat.

President Biden delivered his State of the Union address last night, in which he promised that the US would not hit the debt ceiling and default on its debts. As expected President Biden called for increased taxes on stock buybacks as well as billionaires, while also touting efforts to near-shore American manufacturing that is aligned to critical supply chains. It probably wasn’t the most dramatic State of the Union address which might be partly due to US political gridlock.

Finally back to yesterday and it was another quiet day on the data front, but the US trade deficit came in at $67.4bn in December (vs. $68.5bn expected). Elsewhere, German industrial production for December underwhelmed with a -3.1% contraction (vs. -0.8% expected).

To the day ahead now, and we’ll hear from several central bank speakers including the Fed’s Williams, Cook, Barr, Bostic, Kashkari and Waller, as well as the ECB’s Knot. Otherwise, data releases include Italian retail sales for December, and earnings releases include Disney and Uber.

A team of special Navy divers has recovered remnants of a Chinese surveillance balloon from the depths of the Atlantic Ocean. Surface recovery ships are being used to scoop up the debris while underwater drones locate debris fields for divers.  

On Tuesday evening, the military service released the first images of the spy balloon that was shot down off the coast of South Carolina on Saturday.

A team from Explosive Ordnance Disposal Group 2 was seen in images pulling the balloon fabric out of the water. US Fleet Forces Command provided images, according to Axios. 

Ahead of the recovery effort, Gen. Glen VanHerck, commander of US Northern Command and North American Aerospace Defense Command, told reporters Monday the balloon was massive, measuring 200 feet tall and had a payload weighing nearly a ton. 

“From a safety standpoint, picture yourself with large debris weighing hundreds if not thousands of pounds falling out of the sky. That’s really what we’re kind of talking about.

“So glass off of solar panels, potentially hazardous material, such as material that is required for a batteries to operate in such an environment as this and even the potential for explosives to detonate and destroy the balloon that could have been present,” VanHerck said. 

AP News said the balloon debris would be shipped to two areas: a Coast Guard station south of Myrtle Beach and the FBI lab at Quantico, Virginia. These sites will allow experts to analyze Chinese technology. 

Lawmakers have voiced concern that the ‘weather balloon’ was a spy balloon that could transmit information back to Beijing. Answers to those questions could be as soon as investigators are finished analyzing the debris. 

Authored by Mike Shedlock via MishTalk.com,

Consumer spending hit a brick wall in the US, EU, UK and Australia. Guess what that means…

Is the global consumer starting to capitulate?

On a year over year basis seeing very weak end of the year: pic.twitter.com/EqCD3MvsvI

— Bob Elliott (@BobEUnlimited) February 6, 2023

Not Just EU

Also seeing similar weakness in the UK for the second half of 22 and a worsening momentum in the late year. pic.twitter.com/1CctIETSqW

— Bob Elliott (@BobEUnlimited) February 6, 2023

What About Australia?

The consumer has been critical to making this expansion continue. The signs are that the drags from rising costs and negative real wage growth is starting to weigh on demand. There are limits to the amount of spending that can continue when savings is being drawn down.

— Bob Elliott (@BobEUnlimited) February 6, 2023

“There are limits to the amount of spending that can continue when savings is being drawn down.“

A few months ago I penciled out the excess savings for the US consumer and it looked like summer 23 was when the consumer would start to run into issues. If these pce figures are accurate it looks like consumers may be moving faster than originally guessed. https://t.co/mTh5d2Mdlz

— Bob Elliott (@BobEUnlimited) February 6, 2023

“If these PCE figures are accurate, it looks like consumers may be moving faster than originally guessed.”

Question and Answer of the Day

“If the consumer capitulates, what will drive growth?”

Nothing

Personal Spending Hits a Solid Brick Wall in December Despite Rise in Incomehttps://t.co/h3wvEpnOdd

— Mike “Mish” Shedlock (@MishGEA) February 6, 2023

Welcome to the Global Recession!

Welcome to the Global Recession!

December Was Another Retail Sales Disaster, Even Worse With Negative Revisionshttps://t.co/34NC2ptpHD

— Mike “Mish” Shedlock (@MishGEA) February 6, 2023

Bob Elliott and I have been in a running debate for a couple of months over jobs and a recession. 

I follow him because he always makes a strong case for his point of view: No Recession. 

Elliott is very data dependent, and cautious. This is the first I have seen him waver.

My “welcome” comment was not intended to be mocking, it’s simply how I feel. 

To be fair, I was early again, but not as early as some. I did not bite on the two consecutive quarters of negative GDP to start the year, but I did pencil in a recession starting in May. 

In October, retail sales forced me to admit my error. But in December, industrial production and retail sales put me back in the recession camp. 

Let’s go over the data.

Signs Say Industrial Production Has Peaked and so a Recession is Imminent

Recession lead times in months based on Fed data.

On January 18, 2023, I commented Signs Say Industrial Production Has Peaked and so a Recession is Imminent

Industrial production decreased 0.7 percent in December and 1.7 percent at an annual rate in the fourth quarter. 

Industrial Production Synopsis

• Industrial production peaked in October

• Manufacturing peaked in April with a double top in September

• Consumer durable goods peaked in April

• Manufacturing durable goods peaked in September

• Motor vehicles and parts peaked in October

Recession lead times vs industrial production tend to be very small, typically 1-2 month. 2001 and 2020 were notable exceptions.

Existing Home Sales Decline for the Eleventh Straight Month

Existing home sales from the National Association of Realtors via St. Louis Fed

It was nearly a clean sweep for existing home sales in 2022, down every month except January.

For details, please see Existing Home Sales Decline for the Eleventh Straight Month

December Was Another Retail Sales Disaster

Retail sales from commerce department, chart by Mish

Month-Over-Month Advances and Declines

• Food Service: -0.9 percent

• Food Stores: +0.0 percent

• Gas Stations: -4.6 Percent

• General Merchandise: -0.8 Percent

• Excluding Motor Vehicles and Gas: -0.7 Percent

• Excluding Motor Vehicles: -1.1 Percent

• Nonstore (Think Amazon): -1.1 Percent

• Motor Vehicles: -1.2 Percent

• Department Stores: -6.6 Percent

For further discussion, please see December Was Another Retail Sales Disaster, Even Worse With Negative Revisions

The BEA agreed with the advance numbers.

Personal Spending Hits a Solid Brick Wall in December Despite Rise in Income

Real Personal Consumption Expenditures from BEA, chart by Mish

On January 27, I noted Personal Spending Hits a Solid Brick Wall in December Despite Rise in Income

Brick Wall

• Consumers literally hit the brick wall then went into reverse in November and December.

• Real PCE fell 0.2 Percent in November and 0.3 percent in December.

• Real PCE Goods were negative 0.9 percent in both months.

• Real PCE Services rose 0.2 percent in November and was flat in December.

Data Consistent With Recession

Please see Alice Debates the Mad Hatter and the Red Queen on Timing the Recession

If for some reason you believe fourth-quarter GDP was robust, please see 4th Quarter 2022 GDP Is Much Weaker Than Headline Numbers, Recession Is Not Off.

Data is consistent with a recession starting in November or December.

When is the last time housing was down for a full year, industrial production down two months, and real spending down two months and the the economy was not in recession?

Factor in a decline in consumer spending in the EU, UK, and Australia and where are US exports headed? 

And with consumer spending falling off the cliff, how long will jobs stay strong? Strong enough to prevent a recession that history suggests has already started?

In Wonderland, jobs will save the day, assuming you believe the December Jobs data, but I don’t.

*  *  *

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The Russia-Ukraine war highlighted how geopolitical risk can up-end supply chains and weaponize trade. More precisely, the war led to trade sanctions, a food crisis, and energy shortages.

In this graphic from The Hinrich Foundation, the third in a five-part series on the sustainability of trade, Visual Capitalist’s Jenna Ross explores how geopolitical risk differs by economy. It pulls data from the 2022 Sustainable Trade Index, which The Hinrich Foundation produced in collaboration with the IMD World Competitiveness Center.

Breaking Down Geopolitical Risk

Geopolitical risk has a strong correlation with GDP per capita, meaning that developing economies typically have less stability.

The following table shows how geopolitical risk breaks down for select economies that are covered in the 2022 Sustainable Trade Index. A lower number indicates less stability, while a higher number indicates more stability.

Source: World Bank, based on the latest available data from 2020. Values measure perceptions of political instability and violence, which are a proxy and precursor to geopolitical risk.

New Zealand has the highest level of stability, likely supported by the fact that it is a small nation with no direct neighbors. The country has taken steps to repair relationships with Indigenous peoples, through land and monetary settlements, though challenges remain. 

The U.S. has moderate stability. It has been impacted by increasing political polarization that has led to people having lower trust in institutions and more negative views of people from the opposing party. As the world’s largest economy, the U.S. also faces geopolitical risk such as escalating tariffs in the U.S.-China trade war. 

Want more insights into trade sustainability?

Download the 2022 Sustainable Trade Index for free.

Russia has one of the lowest levels of stability. The country’s invasion of Ukraine has led to war along with economic roadblocks that restrict normal trade activity. For instance, sanctions against Russia and blocked Ukrainian ports led to a food shortage. The two countries supply a third of the world’s wheat and 75% of the sunflower oil supply. 

The Impact of Geopolitical Uncertainty on Trade

Geopolitical risk can lead to civil unrest and war. It also has economic consequences including trade disruptions. As a result of the Russia-Ukraine war, the World Bank estimates that “world trade will drop by 1%, lowering global GDP by 0.7% and GDP of low-income economies by 1%.” A separate study found that Pakistan’s history of political instability has negatively affected trade in the country.

Of course, geopolitical risk is just one component of an economy’s trade sustainability. The Sustainable Trade Index uses a number of other metrics to measure economies’ ability to trade in a way that balances economic growth, societal development, and environmental protection. To learn more, visit the STI landing page where you can download the report for free.

Authored by John Mac Ghlionn via The Epoch Times,

Once an idea reserved for the pages of dystopian sci-fi novels, brain hacking is already here. The elites in Davos appear to be interested in harnessing this technology to further their questionable agenda…

At a recent World Economic Forum (WEF) presentation, those in attendance were told that attempts to decode the human brain was already well underway. As Tim Hinchcliffe, a man who has been sounding the alarm on the WEF’s plans for years, noted, the presentation came five years after historian Yuval Noah Harari told those in Davos that human beings were entirely hackable. We are, in a nutshell, walking, breathing, living algorithms, according to the academic. Harari’s vision, at the time, was a thing of feverish fantasy. Now, though, this fantasy is fast becoming a reality.

At the WEF Annual Meeting 2023, The Atlantic’s CEO Nicholas Thompson chaired a session called “Ready for Brain Transparency?” The session opened with an Orwellian-inspired video showing a scenario in which employees’ brainwaves were monitored and decoded. Besides using the information gathered to evaluate employee performance, brainwaves were decoded to assess whether or not any individuals had participated in criminal activity.

Following the video, Duke University’s Nita Farahany, an expert on both the ethical and legal implications of emerging technologies, explained to the audience that methods of decoding brainwaves already exist. Certain technologies, she said, already allow powerful organizations and governments to “pick up and decode faces that you’re seeing in your mind—simple shapes, numbers, your PIN number to your bank account.”

A file photo of an electroencephalogram (EEG) cap used to study brain activity. (Oli Scarff/Getty Images)

“Artificial intelligence,” she continued, “has enabled advances in decoding brain activity in ways we never before thought possible.” All those thoughts and feelings bubbling around inside, added Farahany, are just pieces of data, adding that this data can be decoded using artificial intelligence (AI). Contrary to popular belief, devices used to decode this “data” needn’t be as invasive as Elon Musk’s neural implants. According to Farahany, devices used are more like Fitbits for the human brain. “We’re not talking about implanted devices of the future; I’m talking about wearable devices that are like Fitbits for your brain,” she concluded in a rather chirpy tone.

On the same day Farahany was giving her presentation, NATO Secretary General Jens Stoltenberg was also in Davos. Like Farahany, Stoltenberg probably knows his fair share about brain hacking. In 2021, NATO chaired a forum exploring the “‘weaponization of brain sciences” and exploiting the “‘vulnerabilities of the human brain.” As reported by Project Censored, an organization dedicated to the promotion of investigative journalism, greater media literacy, and critical thinking, the forum was created to explore “more sophisticated forms of social engineering and control.” This explains why, in the two years since the forum, NATO has added a sixth level to its five operational domains (air, land, sea, space, and cyber): the cognitive domain.

In a NATO-approved piece, experts from Johns Hopkins University and Imperial College London discuss the many ways in which the human mind should be considered a battlefield. Cognitive warfare, they noted, involves much more than changing what people think; it also involves changing people’s behaviors. “Waged successfully,” reads the piece, cognitive warfare “shapes and influences individual and group beliefs and behaviours to favour an aggressor’s tactical or strategic objectives.” The aggressors “could conceivably subdue a society without resorting to outright force or coercion.” NATO’s purpose, it’s important to remember, is to keep us safe. That purpose appears to be changing.

From the origin of the coronavirus to claims of Russian collusion, this is the golden age of information warfare. But the golden age, with its focus on media control, is currently evolving. As the academics Tzu-Chieh Hung and Tzu-Wei Hung explained in an article last year, cognitive warfare extends from focusing solely on media control to explicit brain control. Cognitive warfare seeks to weaponize “neurological resources” as well as “mass communication techniques.” Whereas information warfare focuses almost entirely on the input of information, cognitive warfare focuses on both the input and the output (that is, our behaviors).

One needn’t be a card-carrying QAnon member to read the above and feel a profound sense of dismay. Talks of hacking the brain are straight out of communist China. As I write this, the Chinese Communist Party (CCP) is already using cognitive warfare to subdue the enemy. In the not-so-distant future, the unelected globalists in Davos and Brussels, home to NATO’s headquarters, could use the very same technology to subdue us.

The French nationwide strike over proposed pension reform (Macron is seeking to raise the retirement age from 62 to, gasp, 64; the French say “non”) which we profiled last week, interrupted on Tuesday the shipment of fuels from refineries and a fuel depot of TotalEnergies, the French supermajor told Reuters.

Workers and employees in various sectors, including the energy sector, civil servants, and teachers, have been staging strikes for weeks to protest against President Emmanuel Macron’s plan to raise the retirement age.  

Workers at the oil refineries at Donges and Feyzin, operated by TotalEnergies, are on strike today, a representative of the Force Ouvriere trade union told Reuters. Workers at the fuel depot Flandres have also joined the massive industrial action in France, the official added.  

As Oilprice notes, this is not the first time that fuel deliveries have been disrupted by strikes this year. 

Two weeks ago, the strike in France halted wholesale fuel deliveries from three refineries operated by TotalEnergies on the first day of a series of planned nationwide strikes in many sectors. The Donges, Normandy, and Feyzin refineries of TotalEnergies stopped the wholesale supply of gasoline and diesel, while the refinery at Feyzin had to reduce processing rates to a minimum on January 19.

TotalEnergies and the French unit of ExxonMobil hold most of the refining capacity in France. The strikes against Macron’s unpopular pension reform are expected to continue.

The most recent wave of strikes comes three months after refinery workers went on strike for weeks in September and October amid a pay row. Strikes at refineries in France in the autumn of 2022 left more than 60% of the country’s refining capacity offline while gas stations in and around Paris and in the northern part of the country began to run out of fuel.

The strikes against the planned pension reform also come just as the EU banned imports of petroleum products from Russia as of February 5.

Authored by Scott Ritter,

Tank warfare has evolved. The large force-on-force armored battles that were the hallmark of much of WWII, the Arab-Israeli conflicts, which served as the foundation of operational doctrine for both NATO and the Soviet Union (and which was implemented in full by the United States during Operation Desert Storm in 1991), has run its course.

Like most military technological innovations, the ability to make a modern main battle tank survivable has been outstripped by the fielding of defensive systems designed to overcome such defenses. If a modern military force attempted to launch a large-scale tank-dominated attack against a well-equipped peer-level opponent armed with modern anti-tank missiles, the result would be a decisive defeat for the attacking party marked by the smoking hulks of burned-out tanks.

Don’t get me wrong: tanks still have a vital role to play on the modern battlefield. Their status as a mobile bunker is invaluable in the kind of meat-grinder conflicts of attrition that have come to define the current stage of large-scale ground combat. Speed and armor still contribute to survivability, and the main gun of a tank remains one of the deadliest weapons on the modern battlefield.

But the modern tank performs best as part of a combined arms team, supported by infantry (mounted and unmounted) and copious amounts of supporting arms (artillery and close air support.) As part of such a team, especially one that is well-trained in the art of close combat, the tank remains an essential weapon of war. However, if operated in isolation, a tank is simply an expensive mobile coffin.

Much has been made about the recent decision made by NATO and allied nations to provide Western main battle tanks to Ukraine. The politics of this decision is its own separate topic. This article will address the operational practicalities of this decision, namely has the military capability of Ukraine been enhanced through the provision of these new weapons systems.

To answer this question, one needs to examine three basic issues: training, logistical sustainability, and operational employment.

Training

It takes 22 weeks to train a basic American M1 Abrams crewmember. That training just gives the soldier the very basic skill set to be functional. Actual operational expertise is only achieved through months, if not years, of additional training in not just the system itself, but employing it as part of a similarly trained combine arms team. Simply put, even a Ukrainian tank crew experienced in the operation of Soviet-era T-72 or T-64 tanks will not be able to immediately transition to a Western-style main battle tank.

T-72B3M main battle tanks from the 1st Guards Tank Regiment at Red Square

First and foremost, the crew size of a Soviet-era tank is three, reflecting the reality that the Soviet tanks make use of an automatic loading mechanism. Western tanks have four crew members because the loading of the main tank gun is done manually. Adapting to these dynamics takes time, and requires extensive training.

Training is expensive. NATO is currently providing Ukraine with three types of Western main battle tank: the British Challenger 2, the German Leopard 2, and the American M1A2. There is no unified training course—each tank requires its own unique training prospectus that is not directly transferable to another system.

The decentralized training processes created by such a diverse approach promotes inefficiencies and generates discrepancies in outcome—one crew will not be like another, which in combat, where units are supposed to be interchangeable to promote predictable outcomes if all other circumstances remain the same, is usually fatal.

Moreover, these problems will only be enhanced by the emphasis that will be placed on rapid outcomes. The reality is whatever training programs that are developed and delivered by the nations providing the tanks will be insufficient to the task, resulting in poorly trained crews taking extremely complicated weapons systems into the most dangerous environment in the world for a tank—the teeth of a Russian Army designed and equipped to kill these very same tanks.

Logistical Sustainability

Tanks are among the most technically challenging weapons systems on a modern battlefield. They are constantly breaking down, especially if not properly maintained. For the M1 Abrams, for every hour a tank is in the field, there are three hours of maintenance time required. This problem only becomes magnified in combat.

Normally an armor unit is equipped with highly specialized organic maintenance crews that can repair most of the minor issues that can sideline a tank. Given the training requirements to produce this level of high-quality mechanic, it is unlikely Ukraine will be provided with this kind of maintenance support.

A Ukrainian artilleryman throws an empty 155MM shell tube as Ukrainian soldiers fire a M777 howitzer towards Russian positions on the frontline of eastern Ukraine, on November 23, 2022.

This means that the tanks that are being provided to Ukraine will need to be returned to NATO nations for any significant repairs of equipment that is damaged through simple usage or actual combat. In short, it is highly likely that a Western main battle tank in Ukrainian hands will break down at some point during its operational use by Ukraine, meaning that the total number of tanks available to Ukraine will be far less than the number of tanks provided.

Operational Employment

Ukraine’s commander in chief of the Armed Forces, General Valerii Zaluzhnyi, told The Economist last month that he needed 300 tanks, 500 infantry fighting vehicles, and 500 artillery pieces, if he were going to have any chance of defeating [Russia].

Following the January 20 meeting of the Ramstein Contact Group, and subsequent follow-on discussions about the provision of tanks, NATO and its allied partners have agreed to provide less than 50% of the number of tanks requested, less than 50% of the number of infantry fighting vehicles requested, and less than 20% of the artillery requested.

Moreover, the timetable for delivery of this equipment is staggered incoherently over a period that stretches out for many months, and in some cases extends into the next year. Not only does this complicate training and logistical sustainability issues that are already unfavorably inclined for Ukraine, but it makes any meaningful effort to integrate this material into a cohesive operational employment plan all but impossible. In short, Ukraine will be compelled to commit the equipment provided—especially the tanks—into combat in piecemeal fashion.

The truth about tanks is that NATO and its allied nations are making Ukraine weaker, not stronger, by providing them with military systems that are overly complicated to operate, extraordinarily difficult to maintain, and impossible to survive unless employed in a cogent manner while supported by extensive combined arms partners.

The decision to provide Ukraine with Western main battle tanks is, literally, a suicide pact, something those who claim they are looking out for the best interests of Ukraine should consider before it is too late.

Authored by Andrew Thornebrooke via The Epoch Times (emphasis ours),

Chinese state-owned television aired footage of a high-altitude balloon dropping hypersonic weapons in 2018.

The stunning footage displays a high-altitude balloon, not dissimilar from the one that traversed over the United States last week, carrying three hypersonic glide vehicles (HGVs) into high altitude and dropping them for testing.

Chinese state broadcaster CCTV reported on the weapons test in September 2018. The footage has since been deleted from Chinese media, but photographs and short clips can still be found online.

In one post from 2018, a Twitter user shared footage from Douyin, China’s version of TikTok, which shows the balloon lifting the three HGVs from the ground.

Screenshots from this Douyin short video. pic.twitter.com/XvhnzMhhY7

— dafeng cao (@dafengcao) September 21, 2018

The black one i.e. D18-2/S using different material featuring cantilever wing is rare in hypersonic configuration design. pic.twitter.com/m6vRJ6Jyub

— dafeng cao (@dafengcao) September 22, 2018

HGVs are generally launched by rockets in a similar manner to traditional missiles. Upon reaching orbit, however, HGVs detach from the rocket and fly through the atmosphere using their own momentum.

Such weapons are much faster than other missiles while they are in low orbit, but become much slower upon hitting the dense air of the atmosphere as they have no jets to power them. The three HGVs dropped by the balloon in the footage appear to have been designed to test this phenomenon.

The balloon-dropped HGVs were part of an effort to develop precision warheads for hypersonic weapons, which would give the Chinese military an “unstoppable nuclear-capable weapon,” according to the South China Morning Post.

Read more here…