$61B Aid for Ukraine and $26B for Israel

Welcome back to SovereignBeat! Last week centered on the annual IMF and World Bank spring meetings in Washington, alongside a successful push by the House of Representatives in the capital to finally approve aid for Ukraine, Israel, and Taiwan.

In this publication:

• IMF projects higher global growth

• Powell Signals No Fed Cuts Until After June, ECB Likely to Cut in June

• Oil goes down despite tit-for-tat strikes between Iran and Israel

• US House approves $95bn in military and humanitarian aid after months of delay

Let’s dissect

Markets Snapshot

• During IMF and WB spring meetings Washington, D.C., The IMF has revised its global economic growth forecast to 3.2% year-on-year (yoy) in 2024, marking a 0.1 percentage point increase from its January projection. Estimate in October was 2.9%. This upward adjustment is primarily driven by robust growth in the US and certain emerging markets. However, the IMF has also sounded a note of caution regarding inflation and geopolitical uncertainties. Short-term growth prospects are being dampened by elevated borrowing costs and reduced fiscal stimulus, while the medium-term outlook is clouded by factors such as sluggish productivity growth and trade uncertainty, making it one of the weakest in decades.

• The IMF has also indicated that the most severe inflationary pressures in the Middle East region have eased, despite the ongoing effects of the conflict in Gaza and attacks on shipping routes. Inflation in the region is projected to decrease to 15.4% yoy this year, down from the previous estimate of 16%. The forecast for 2025 anticipates inflation at 12.4%. Excluding high-inflation countries like Egypt, Sudan, and Iran, the forecasted price growth for this year is 8.7%. However, the IMF's growth forecasts for the region remain pessimistic, with expectations of 2.7% year-on-year GDP growth this year, a decrease of 0.2 percentage points from the previous forecast.

Bond Markets

• US: Federal Reserve (Fed) Chair Jerome Powell warned on Tuesday that persistent inflationary pressures are likely to postpone any Federal Reserve interest rate reductions until later this year, potentially resulting in a period of prolonged higher interest rates. In practical terms, the Fed Board will take more time to gain confidence that inflation is progressing towards the targeted 2% rate, potentially resulting in fewer than the three quarter-point reductions forecasted by its officials during their most recent meeting in March. Powell’s comments make it clear the Fed is now looking past June for potential rate cuts, if any, this year. The market probability of the rate cut in June during the FOMC meeting is only around 16%. Following the remarks by the Fed chair, the US dollar declined, reversing its strongest five-day rally since late 2022.

• Bank of America's (BofA) monthly global Fund Manager Survey highlights a significant shift in sentiment among money managers regarding the trajectory of the economy over the past year. In the latest survey released on Tuesday, 36% of respondents expressed belief that the most probable scenario for the global economy in the next 12 months is a "no landing," marking a significant increase from the 23% recorded a month ago and a substantial rise from 7% at the beginning of the year. Last year, much of the debate on Wall Street revolved around whether a hard or soft landing was looming for the economy. Now, analysts are debating whether there will be any landing at all.

• EU: In contrast to the hawkish Fed, ECB President Christine Lagarde remarked that Europe's economy is "recovering, and we are clearly seeing signs of recovery" after more than a year of near stagnation. While expectations point towards the ECB cutting interest rates at its June meeting, the trajectory of rates after that remains uncertain. If Europe continues with interest rate cuts while the US refrains from lowering rates, the Euro could face downward pressure. Lagarde emphasized that the ECB will consider the impact of currency fluctuations on inflation, in addition to its mandate of ensuring price stability.

Commodity Markets

• Oil: Price remained largely unaffected by the tit-for-tat strikes between Iran and Israel. By the end of the week, Brent settled at $87 per barrel, which was below the pre-attack level of $90. According to Goldman Sachs, current oil prices already incorporate $5 to $10 per barrel of geopolitical risk, suggesting that prices might decrease further without additional negative developments or escalation. Furthermore, in the absence of supply disruptions from the ongoing conflict, Brent oil prices are likely capped around $90 a barrel. Brent dropped below $87/barrel after a 3% slide on Wednesday, driven by a 2.7 million barrel surge in US crude inventories last week and a dip in fuel demand, reinforcing the argument.

Geopolitics

Breakthrough on $61B Aid for Ukraine

• On Saturday, The US House of Representatives has finally approved $61 billion in military aid for Ukraine to bolster its defense against Russia. This breakthrough comes after months of debates and lack of any action on Capitol Hill. Notably, all Democrats supported the bill, while 112 Republicans voted against it. In addition to Ukraine, the House garnered bipartisan support to approve $26 billion for Israel and humanitarian efforts in the region, alongside an $8 billion funding bill for the Indo-Pacific, with a quarter allocated to replenishing weapons and ammunition systems in Taiwan, bringing the total emergency aid to $95 billion. The three bills are now headed to the Senate as one package. The Senate is expected to pass the bill next week, sending it to Biden to sign into law.

• $95 billion of US security assistance had remained in limbo for months, facing staunch opposition from far-right Republicans. Johnson's determination to proceed with the votes also jeopardizes his own position, with at least two Republicans threatening to initiate a motion for his removal, just six months into his tenure.

• Efforts to pass legislation securing military aid for Ukraine faced obstacles as some Republicans insisted on tying foreign aid to addressing issues at the US-Mexico border. Despite broad bipartisan support in the Senate for legislation providing $95 billion in wartime aid to Ukraine, Israel, and other American allies back in February, Speaker Johnson initially resisted bringing the Senate bill to a House vote.

• The current $95.3 billion spending package closely resembles the Senate's February approval, with adjustments made to secure backing from Republicans. One important distinction is that the bill was split into three separate pieces of legislation, each voted on separately, specifically addressing aid for Ukraine, Israel, and the Indo-Pacific region individually. Of the $61 billion in aid to Ukraine, nearly $48 billion would be allocated to the U.S. Defense Department. This funding aims to provide weapons and supplies for Ukraine's military, replenish stockpiles of equipment previously sent to Ukraine, and support operations of the U.S. Armed Forces European Command. The U.S. State Department would receive nearly $9.5 billion in forgivable economic loans to distribute, $7.8 billion allocated for sending defense equipment to Ukraine and $2 billion for security assistance. Structuring the aid as a loan aligns with a key policy proposal from the Trump administration and is supported by several Republicans who were unwilling to proceed with the previous version of the bill.

Our thoughts

• The multiple bills proposed by Johnson, mainly driven by the recent Iranian attack on Israel, a critical US ally. The urgency to support Israel post-attack hastened the resolution of aid for Ukraine within the US government, notably as the Senate had previously considered a single bill encompassing aid for both nations.

• Voting on three separate bills hedged the risk of lacking enough votes for a single comprehensive bill, especially as Republicans are more divided on aid to Ukraine than to Israel.

• Saturday's House vote to allocate $61 billion in American aid to Ukraine serves as a clear indication that, at least in foreign policy matters, the Republican Party is not entirely aligned with former President and top Republican candidate number one for the upcoming election, Donald Trump, and his "America First" movement. While this vote may temporarily resolve the Ukraine issue, divisions within the Republican Party are likely to persist.

Thank you for checking out the latest SovereignBeat newsletter! Share your thoughts on the topics covered and let us know if there's anything specific you'd like us to explore.

Read our other publications here

Our Further Reading Recommendations

• Russia finally leaves Nagorno-Karabakh (Politico)

• WB Pledges to Connect 250 million Africans to the grid by 2030 (Barrons)