After a hot start to the year, markets took a breather this week, with declines across all major indices. There were no significant economic releases during the week; however, all eyes will be focused on next Tuesday when the U.S. Bureau of Labor Statistics releases the January inflation numbers. Expectations are for an increase of 6.2% YoY and 0.4% MoM, which would be the lowest YoY number since October 2021. We’ll keep our fingers crossed for a good number.
Shifting gears, we’ve heard many people talking about and asking about the impending debt limit “crisis,” so we thought it would be prudent to address the issue. The best place to start is with the debt limit definition as stated by the Department of the Treasury, and that is “the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments.” The debt limit does not allow for any new spending commitments; it simply allows the government to pay existing legal obligations that past Congresses and Presidents have authorized. The current debt limit is slightly more than $31.4 trillion, which is incredibly hard to comprehend.
As of January 19 of this year, the debt limit has already been reached. Due to this, the U.S. government is operating under a series of temporary actions called “extraordinary measures.” Without going into too much detail, some of these items include suspending payments to some government employee savings programs, underinvesting in certain government funds, and delaying auctions of securities. The Treasury Department estimates that these actions will keep the government afloat until June. If an agreement does not come about by June, it is generally accepted that the ramifications would be highly detrimental to the U.S. and global economies. Some potential consequences of failing to reach an agreement include a downgrade by credit rating agencies (raising borrowing costs), potential job losses, and a dropoff in consumer confidence.
While this may seem scary, especially given the heightened polarization in the political world today, it’s important to remember that the debt limit has been raised 78 times since 1960. This includes 49 times under Republican presidents and 29 times under Democratic presidents. Invariably, Congressional leaders from both parties have consistently recognized the importance and the necessity of reaching an agreement. So while it will likely grab headlines over the next four months, a deal is expected to get done, averting the most negative potential outcomes.
Economy
- The U.S. equity markets declined for the week ending February 10, with the S&P 500 down -1.1% and the small-cap Russell 2000 down -3.4%. It was a light week with no significant economic releases, but Fed Chair Powell warned that if robust labor data persists, the terminal level of the Fed funds rate may be higher.
- The trade deficit in the U.S. widened to $67.4 billion in December 2022, which was the lowest since September 2020. Forecasts were for a $68.5 billion gap, with exports falling 0.9% to $250.2 billion, led by nonmonetary gold, crude oil, and foods, feeds, and beverages. In comparison, imports rose 1.3% to $317.6 billion, prompted by purchases of cell phones and passenger cars. For all of 2022, the U.S. trade deficit went up to a record high of $948.1 billion, equivalent to 3.7% of the GDP.
- Unemployment benefits rose to 196k in the week ending February 4, from the previous week’s nine-month low of 183k and above market expectations of 190k. Still, the latest figure suggested the labor market remained tight, which could contribute further to inflationary pressure and the Fed maintaining higher rates for longer.
- Preliminary results from The University of Michigan consumer sentiment report, jumped to a 13-month high of 66.4 in February 2023 from 64.9 in January, beating market forecasts of 65. The gauge for current economic conditions improved to 72.6 from 68.4 in the previous month, but the expectations subindex fell to 62.3 from 62.7.
Stocks
- U.S. equities were in negative territory. Communication Services and Consumer Discretionary led the decline, while Energy and Healthcare outperformed. Value stocks led growth stocks and large caps beat small caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 21 basis points to 3.74% during the week.
- Global bond markets were in negative territory this week.
- Government bonds led for the week, followed by high yield bonds and corporate bonds.
