The Firing Gun Starts on the Second Week of the Year

In the Middle East; Antony Blinken was speaking in Turkey on Saturday, the first stop on a tour that will take in Jordan, Egypt and Israel over the coming days, and warned that the conflict could worsen. His words came after Hezbollah launched around 40 rockets into Northern Israel in a first response to the killing of one of their senior leaders in Beirut last week and also comment from the head of the Israeli Defence Forces chief spokesman, that Israel has successfully destroyed Hamas as an organised fighting force in northern Gaza and are now focussing on dismantling it in central and south Gaza.

Mr Blinken is likely to try and pressure Israeli PM Netanyahu to do more to protect civilians in Gaza and allow more aid into the country. He’s also likely to pass comment on the far right of Netanyahu’s government who have made calls for the mass resettlement of Palestinians, as well as press for more detailed plans for how Gaza will be governed when the military offensive ends.

Yesterday, top Democrat and Republican politicians in the US houses of congress reached an agreement in principle over federal spending for 2024. Here, Chuck Schumer (the Democratic Senate majority leader) and Mike Johnson (the Republican House Speaker), announced that a $1.66tn package has been agreed, in what is hoped will avoid a government shutdown. According to Johnson, the spending package is made up of $886bn for defence and $704bn for non-defence spending, though there remains some question marks over the exact numbers.

Given that federal funds for some functions of government are set to run dry by 19 January, the looming threat of a government shutdown will likely act as an impetus for members of congress to push through the deal. Nevertheless, since the agreement will need to be passed through the House and the Senate, some are thus contemplating whether such a bill will be able to be passed in time.

To give this agreement some perspective, over 2022, the US Federal Government spent around $6.3tn, having collected around $4.9tn in tax revenues leaving it with a gargantuan $1.4tn deficit. Of course, each year these deficits continue to increase the US’ federal debt which now stands at around $31tn. The agreement also comes under the backdrop of last summer’s events on Capitol Hill, where Congress passed the Fiscal Responsibility Act which suspends the debt ceiling through to 1 Jan 2025 – giving the US some breathing space as their debt obligations continue to soar.

Despite its size, it is understood that the agreement, does not however cover spending for further military assistance to Ukraine. This bill – which includes $50bn in military spending to Ukraine – is still subject to stalemate in Congress at the moment – with many Republicans saying that its acceptance is contingent on changes to America’s migration policy.

With the EU’s military assistance package also in stalemate – given vetoes by Orban – all eyes are on whether the West will be able to provide further aid to Ukraine as the full-scale war approaches its third year.

It’s also not lost on any of the policy makers, that this agreement comes in an election year and thus both sides will be keen to present the package as a win for their respective party. Sticking with the US Presidential election, Goldman are seeing that it will likely be supportive of the USD and could offset rate cuts. With markets continuing to debate the Fed’s monetary loosing cycle, Morgan Stanley have said that they see the first 0.25 percentage point cut in rates in June, ahead of a further 25bps cut in September, November, and December. Looking longer term, they also forecast 25bps cuts at each policy meeting in 2025.

Hence, as we look ahead towards key data releases this week (covered in the What We Are Watching release), we will also be paying close attention this week to developments on Capitol Hill, the Red Sea, Israel-Gaza and Ukraine.