The Debt Ceiling Drama Continues

May 23, 2023 • Estimated Reading Time: 5 minutes

Macro Markets

Debt Ceiling

The debt ceiling is causing volatility and uncertainty in the market. We suggest reading the last two weeks' reports on how the 2011 scenario played out and how this can play out. There has been movement in credit markets on the back of the debt ceiling. US companies are rushing to borrow money in the bond market, bringing forward deals in case the country’s debt ceiling stand-off causes turmoil over the summer. Highly rated companies have issued bonds worth $112bn so far this month, according to data from Dealogic, up from $46bn in May 2022 and more than triple the amount sold in April.

Excluding 2020, when ultra-low interest rates sparked a $196bn borrowing frenzy, May corporate issuance this year is the highest in seven years. Bankers who handle corporate bond deals say borrowers are making the most of a relatively buoyant market environment to tap investors before any possible volatility erupts from the US government running out of cash. This scenario could have cascading implications for global asset prices. I think the combination of Treasuries at an acceptable yield for corporates, coupled with the potential that there could be dislocations in the market over the summer concerning the debt ceiling, made it almost a no-brainer for companies to accelerate things.

PCE

Friday will have PCE. The last US PCE Index print came in at 4.2% y/y, and it is expected to fall again, down to 4.1%. The m/m reading is expected to rise to 0.2% from 0.1%. The core reading is expected to remain the same at 4.6% y/y, and the m/m reading is also expected to remain the same at 0.3%. See below for the expectations from Financial Source’s Economic data tracker.

Markets are super focused right now on the debt ceiling and inflation data, given the June hike could still be on the table. If there is a big miss in the data, then you would expect the USD to weaken on expectations that the Fed will need to be less aggressive in hiking rates. You would typically expect that to weaken US 10-year yields and strengthen gold.

If the data comes in high and surprises markets, investors will know that it keeps the pressure on the Fed to raise interest rates. Typically, if inflation comes in high, you would expect US 10-year yields to rise, gold to fall, the USD to rise, and the S&P500 to fall.

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