30th May 2023
Debt ceiling concerns grow in the US
Investors have been concerned about the United States possibly defaulting on its debt for around a century, after the country’s many political challenges in raising its debt ceiling. The US has legal limits on the amount of debt the country can accumulate, and when debt reaches that limit, lawmakers must either agree to increase the debt ceiling or inform lenders that it cannot repay them.
The US debt ceiling has been raised 78 times since 1960. Twenty of those increases have happened since 2001.
The US government must now look once again at increasing its debt ceiling, with the deadline for doing so rapidly approaching. As investors were forced to ponder the consequences of the US not being able to fulfil its debt obligations, global markets had plenty of uncertainty to deal with last week.
UK inflation remains high
In the UK, these concerns coupled with unexpectedly high inflation data led to a decline in the markets – the FTSE 100 and FTSE 250 indices declined 1.7% and 2.6% respectively over the week.
The primary factor in these drops was the inflation figures announced by the Office for National Statistics. The annual CPI inflation rate in April dropped to 8.7% from 10.1% in March; however, this was largely because of the expiration of the comparison period that included the surge in energy prices due to the conflict in Ukraine in April 2022. Core inflation, which excludes the volatile energy, food, alcohol and tobacco prices, reached a 21-year high of 6.8%, up from 6.2%.
A thirteenth consecutive interest rate hike by the Bank of England is now expected by the market, which concerns equity investors because it becomes more expensive for businesses to borrow for improvements or to service existing loans.
More positively, the International Monetary Fund (IMF) is now predicting a 0.4% growth for the UK in 2023. It’s an improvement over their previous prediction in April, when they projected a 0.3% contraction in the UK economy. The change was due to a more positive outlook to resilient demand and falling energy costs, which improves investor sentiment.
Debt ceiling negotiation concerns impact the US stock market
The S&P 500 Index experienced a 1.1% drop on Friday, the largest fall in May. According to reports, some Republicans in the House of Representatives have questioned the urgency of the deadline set by US Treasury Secretary Janey Yellen, known as the ‘x-date’, regarding the government’s ability to meet its financial obligations.
These negotiations were resumed after President Biden returned from Japan, and it wasn’t until the end of the week that a deal was agreed between the president and Republican House Speaker Kevin McCarthy. At time of writing, the Bill still needs to pass Congress.
There have been many ‘last hour’ debt ceiling deals reached historically, usually with concessions from both sides. Despite progress over the weekend, there’s still pressure on the US government to get a deal over the line.
The US Federal Reserve is due to meet on 14th June. Many Fed officials have re-emphasised their focus on combatting inflation, which is still elevated despite recent falls. Headline inflation has shown some improvement, but the Personal Consumption Expenditures price index inflation data increased last week, and services inflation continues to persist due to a robust labour market and high wage growth.
The US GDP growth for the first quarter was also moderately revised upward to 1.3% annualised, giving policymakers more room to increase interest rates.