First and foremost, Happy Mother’s Day to all the moms; thank you for everything you do, and we hope you have a fantastic day!
Unfortunately, we must move on to the less sunny world of economics mixed with politics. And on that front, it would have been hard to miss the discussions this week about the “debt ceiling crisis,” but is there really a storm brewing on the horizon? We first wrote about the debt ceiling three months ago (click here), explaining extraordinary measures, the ramifications of not raising the debt limit, and the history of past increases. We won’t rehash that in detail here, but suffice it to say the failure to raise the debt ceiling would be a tragedy.
To that point, U.S. Treasury Secretary Janet Yellen has been making the rounds over the last week to make it clear that raising the debt limit is non-negotiable. “It’s Congress’s job to do this. If they fail to do it, we will have an economic and financial catastrophe that will be of our own making,” she said. According to Yellen, current estimates show the possibility of running out of money as soon as June 1st, just three weeks from now. The Congressional Budget Office (CBO), a nonpartisan federal agency, also confirmed on Friday their previous warning of potential default risk during the initial weeks of June. “If the debt limit remains unchanged, there is significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations,” said the CBO report. However, they also noted that due to tax revenues and emergency actions post-June 15, government financing operations could likely be sustained until at least the end of July if we make it past the early June cash crunch.
Interestingly, there still doesn’t seem to be a sense of urgency on Capitol Hill, with President Biden and Congressional leaders meeting on Tuesday for the first time in months to discuss the situation. As expected, there was little progress made in the meeting outside of agreeing to daily staff meetings to find a compromise. Moreover, the debt ceiling discussion involving President Biden and leading Congressional figures (House Speaker Kevin McCarthy, House Minority Leader Hakeem Jeffries, Senate Majority Leader Chuck Schumer, and Senate Minority Leader Mitch McConnell), scheduled for Friday, has been deferred to next week.
While an insider described the postponement of the meeting as a positive sign due to continued progress at the staff level, it still leaves a lot of work to get done in short order. Particularly given the opposing stance of both President Biden and Speaker McCarthy. However, regardless of one’s political beliefs, it’s imperative to remember one thing: when push comes to shove, most politicians will choose self-preservation (i.e., how can I get re-elected?) over policy. And between the two options, raise the debt ceiling and live to fight another day, or don’t raise the debt ceiling and cause global economic and political damage, the choice is crystal clear.
Ultimately, the looming risk of a government default has always resulted in consensus throughout history, regardless of which party was in power. The United States has never experienced a default. And while taking the debate to the final minutes could cause its own issues, as long as a deal gets done, those are likely to be minor by comparison.
Economy
- U.S. equity markets were slightly lower for the week ending May 12, with the S&P 500 down -0.3%, the Nasdaq up +0.4%, and the small-cap Russell 2000 down -1.1%. There were quite a few negative headlines regarding the debt limit, but some good news on the inflation front with CPI and PPI coming in below expectations.
- The U.S. annual inflation rate in April dropped to 4.9%, the lowest since April 2021, coming in below market forecasts. Food prices grew slower, energy costs decreased, and shelter costs slowed for the first time in two years. Prices for used cars and trucks declined again.
- U.S. CPI rose by 0.4% in April, exceeding the previous month’s increase of 0.1% but meeting market expectations. The primary factors driving the upward movement were the cost of shelter, used cars and trucks, and gasoline. Meanwhile, food prices remained stable, and there were decreases in the costs of natural gas, airline fares, and new vehicles.
- Core CPI, which excludes volatile items like food and energy, decreased to 5.5%, as anticipated, from 5.6% in the previous month. This decline was attributed to a decrease in rental costs. Monthly, core consumer prices increased by 0.4% from the last month, matching the pace seen in March and aligning with market expectations.
- U.S. PPI increased by 0.2% MoM in April, driven by a 0.3% rise in services costs and a 0.2% increase in goods prices. Annual producer inflation eased for the 10th straight month to 2.3%, the lowest since January 2021, while the core rate fell to 3.2%.
- In the week ending May 6th, the number of Americans filing for unemployment benefits rose by 22k to 264k. Excluding readings impacted by COVID, this is the highest number since September 2017. The increase in claims reflects the possible softening of the U.S. labor market, influenced by a series of aggressive interest rate hikes by the Federal Reserve.
Stocks
- U.S. equities were in negative territory. Energy and Materials led the decline, while Communication Services and Consumer Discretionary outperformed. Growth stocks led value 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 2 basis points to 3.46% during the week.
- U.S. bond markets were in negative territory this week while International bond markets were positive.
- Corporate bonds led for the week, followed by government bonds and high yield bonds.
