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House Passes Debt Ceiling Bill

Last night, the House comfortably passed the debt ceiling bill in arguably the most important stage in the process to ensure that the world’s largest economy averts a technical default. The House of Representatives cleared the Fiscal Responsibility Act by 314-117, the bipartisan deal assembled by President Joe Biden and House Speaker Kevin McCarthy.

Crucially the Bill, which will now go through to the senate suspends the debt ceiling through to 1 Jan 2025 – giving the US some breathing space as their debt obligations continue to soar. As we looked at yesterday, the deal caps federal spending and requires that more people will have to work for food aid, however it also keeps intact much of Biden’s Inflation Reduction Act. As such the bill aims to reduces government deficits by some $1.5T over next 10 years.

 

Roughly speaking the US Federal Government spend around $6.3tn last year having collected around $4.9tn in tax revenues leaving it with a gargantuan $1.4tn deficit. Of course, each year these deficits continues to increase the US’ federal debt which now stands at $31.47tn.

‘Skip, Not Pause’

The Wall Street Journal’s Nick Timiraos has written an article maintaining that it is increasingly likely that the Fed will keep rates unchanged at their next policy meeting on Wednesday 14 June ahead of a further hike later this summer. This would allow Fed officials to better assess the impact of previous rate hikes on the wider economy as well as stresses to the banking system, which has worried economists given fragility in the sector after SVB’s collapse.

The article follows the Fed’s Harker stating that he thinks the Fed can ‘skip’ a hike rather than ‘pause’ as the term pause suggests a rates would be held unchanged for a while whereas a skip is implies rates will be kept unchanged for a shorter period of time. Harker said that “I am in the camp increasingly coming into this meeting thinking that we really should skip”, though he caveated that by saying that US labour market data “may change my mind.”

Such sentiments were echoed by the Fed’s Jefferson who stated that holding rates unchanged should not imply that rates would not be hiked thereafter.

The release of the minutes from May’s meeting suggests that various FOMC committee members evidently favour a June pause with the minutes stating that “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary”. However, the minutes also indicated that “many participants focused on the need to retain optionality after this meeting” and thus their view on whether to raise rates or pause will be driven by recent data. The May meeting saw the Fed raise its base interest rate to 5.25% marking the 10th consecutive rate hike which brought borrowing costs to the greatest level since 2007.

Equities Update

Investor sentiment across equity markets were underpinned by debt-ceiling talks which despite ultimately passing through the House meant that there was a general risk-off mood throughout equity markets. For example, the MSCI world equity index which tracks shares in 50 countries, lost 0.82% during yesterday’s session as the Stoxx 600 and FTSE 100 each lost over 1%. This comes as the FTSE 100 index lost around 5% over the month of May.

 

 

In the US, The S&P 500 ended yesterday 0.6% down while the tech heavy Nasdaq and the Dow Jones lost 0.6% and 0.4%, respectively. This morning however, equity markets have been buoyant on the debt-ceiling bill comfortably passing through congress.

Today in Focus

Today’s chief data releases include Eurozone inflation data at 10:00 which is expected to come in at 6.3%, marking a declaration from last month’s 7% print. This comes as inflation has slowed across Spain, France and Germany. Eurozone unemployment levels are also forecasted to come in at 6.5% – in line with last month. At 13:30 markets will then be looking at ADP figures ahead of Non-Farms tomorrow along with PMI data at 14:45 and 15:00.

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