Ceiling of Debt

May 16, 2023 • Estimated Reading Time: 5 minutes

Macro Markets

We are looking at the end of the rates hiking cycle after last week's 25bp hike. This is most likely the final hike for now unless we see a sizeable uptick in inflation.

The data is trending lower, and the last data points show that the CPI core has been a bit sticky, which is cause for concern. However, we need to see a few months of data to confirm that.

The Fed funds rate is now up a total of 500bp since March 2022, making it the strongest hiking cycle in decades. Powell expressed that policy is tight and real rates are meaningfully above estimates of neutral rates. We could see a June hike if economic activity remains hot and the bank sector shows signs of easing, although this probability is low. The debt ceiling has thrown a wrench into this as well.

The April jobs report was surprisingly strong, given the pick up in initial jobless claims in recent months. Non-farm payrolls added larger than expected 253K jobs in April, and the unemployment rate ticked down to a cycle low of 3.4%. The only solace was the revision of previous months. Average hourly earnings increased 0.5% last month, the firmest gain in just over a year.

Despite the ongoing strength in labor markets, most of the business surveys for April point to a cautious environment for labor. Consumer spending also appears to be resilient, with better-than-expected April vehicle sales and active travel and leisure.

This week, the biggest story is that given the disappointing April Tax data, both treasury secretary Yellen and the congressional budget office warned that the debt ceiling default date could come as early as June. Estimates indicate treasury has just 41 billion of its extraordinary measure remaining as of April month end. Treasury will exhaust all its resources to avoid a technical default by June 9th . We also have 80 billion in Social Security and Medicare payments due in the first two days of June. We go into detail about the debt ceiling in Wizards Musing.

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