Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 30/05/23
President Biden and House Speaker McCarthy formed a deal to break the US debt ceiling impasse
Key Takeaways
President Biden and Republican House Speaker McCarthy reached an agreement in principle on Saturday that would suspend the $31.4 trillion debt limit until January 2025. According to the spending restrictions implied by the Fiscal Responsibility Act, non-Defense outlays will remain broadly flat for the FY 2024 and will increase by a mere 1% in FY 2025 compared with 2024. On the other hand, defense spending will increase by 3.3% in FY 2024 and by a further 1% in FY 2025.
The bill must be approved by both Chambers of Congress and then be signed by the President. (House: 222 Republicans – 213 Democrats, Senate: 49 Republicans – 51 Democrats). Meanwhile, Treasury Secretary J. Yellen updated her estimate of the X-date -- the date on which the US government will be unable to meet all its obligations -- from June 1 to June 5, giving lawmakers some breathing room.
The S&P500 has been broadly unperturbed by debt ceiling negotiations (+0.9% MtD & +9.5% YtD), finding support from the Technology sector (+9.8% MtD & +34% YtD). The IT sector increased by +5.1 wow, with Nvidia overperforming (+25% wow | +167% ytd to circa $1 trillion), following better-than-expected results for Q1:2023 and positive guidance for Q2:2023 due to strong demand for semiconductors related to generative AI.
As far as monetary policy is concerned, the minutes of the FOMC meeting on May 3rd revealed that Federal Reserve officials were divided on the need for further rate increases. Specifically, “several” participants noted that “further policy firming may not be necessary”, while “some” commented that “additional policy firming would likely be warranted”.
Investors are divided too, pricing-in a 60% chance of another +25 bps hike on June 14th to a range of 5.25% - 5.50%, from c. 25% probability in the past week. Looking forward (H2.2023), investors are now pricing higher interest rates for longer due to sticky inflation and decent real GDP growth.
On the other side of the Atlantic, the European Commission’s 2023 European Semester Spring Package has been released. According to the 2023-2026 National Stability Programs (SPs) by member states and own calculations using weighted averages based on nominal GDP data, euro area real GDP growth is expected at +1.1% for 2023 (European Commission estimates: +1.1%), +1.9% for 2024 (European Commission estimates: +1.6%), +1.6% for 2025 and +1.5% for 2026.
Euro area fiscal balance -- weighted by SPs -- is expected at -3% in 2023 (EC: -3.2%), though there is considerable uncertainty regarding Germany’s projected deficit due to the Economic Stabilization Fund-Energy contribution.
In 2024, euro area fiscal balance is expected at -2.7% (EC: -2.5%), followed by -2.1% in 2025 and -1.8% in 2026, from -3.6% in 2022. Note that the general escape clause of the Stability and Growth Pact, which provided room for a temporary deviation from the budgetary requirements in the post covid era, will be deactivated in 2024, with new fiscal rules still under negotiations.
Finally, the euro area Government Debt-to-GDP ratio -- weighted by SPs -- is expected at 92.1% in 2023 (EC: 90.9%), 91% in 2024 (EC: 90.1%), 90.5% in 2025 and 89.8% in 2026.