Biden and McCarthy Hold Debt Ceiling Talks

Last weekend, Biden said that while his Administration would be willing to reduce some spending plans, the latest offer from the Republicans was unacceptable. Thus, with the world’s largest economy being just days away from X-date (the date which denotes when the US have breached their debt ceiling and would be in technical default given payments to be made), tensions on Capitol Hill are growing. On 1-2nd June for instance, Treasury have a $80bn bill in Social Security and Medicare payments which will mean that they “will be running with little margin for error” during the first week in June, according to JP Morgan. Here, analysists indicate that X-date would be set at 7 June, if no bipartisan deal is reached. This is slightly later than Treasury Secretary Janet Yellen’s indication that the US government could run out of extraordinary measures to pay its obligations as early as 1st June. Given that the Republicans hold a majority in the House, while the Democrats hold a majority in the Senate, any deal will require bipartisan support. While it is looking probable that a deal will be reached to raise the ceiling, the prospect of 11th hour negotiations also appears likely.

X-date has – in one way or another – been realised some 78 times since 1960, each time requiring Capitol Hill to raise the roof to ensure that the world’s largest economy does not defaults on its debt obligations. For example, there were three X-dates over the course of Trump’s one-term tenure which collectively saw national debt rise over $8tn. During Obama’s presidency the debt-ceiling crisis of 2011 saw global markets on the edge of its seat as Washington scrambled to find a solution with only days to spare. The Republican’s agreed to a raising of the celling in return for passing the Budget Control Act of 2011, which would cut public spending, though not enough to ensure that the ceiling was not breached a couple of years later…and a couple of years later again after that. According to JP Morgan’s poll, the majority of investors expect a weaking of the dollar in the event of X-date, with a flight to safety feeding into support for safe havens such as JPY and CHF.

With financial markets continuing to keep one eye on the situation, Both Biden and McCarthy have agreed to continue meeting over the coming days as the prospect of X-date draws

ever closer.

Spain’s de Cos: Further Tightening in Sight for ECB

Speaking yesterday, the Governor of the Bank of Spain, Pablo Hernández de Cos said that the ECB still has some way to until it reaches the end of its tightening cycle. De Cos, who serves on the Governing Council further sent hawkish tones as he indicated that rates across the eurozone would have to remain elevated for “a long time to reach our target in a sustained manner”. Such hawkish tones are a reminder of the scale of the challenge the ECB faces, particularly given how de Cos is considered amongst Frankfurt’s more dovish members.

As we looked at last week, according to a poll conducted by Reuters last Monday, out of the 62 economists polled, all took the view that the ECB would hike on 15 June, though 20 of the respondents maintained that the ECB would cease from further hikes. Conversely, 42 saw a further 50bps of rate hikes with five of these believing that there was 75bps of hikes left before the ECB reached their terminal rate.