By Marc Chandler The US debt ceiling looms. The House Republicans are still formulating their strategy. Treasury Secretary Lew has said his ability to maneuver will be exhausted by February 27. While this sounds like ample time to avoid a delayed payment or default, the problem is that Congress is recesses this Wednesday and will not return for a full […]
Tag: debt ceiling
The US is now on track to reach only 1.6% real GDP growth for 2013 – in spite of the extraordinary amount of central bank stimulus. The sad part about this weakness is that to some extent it has been self-inflicted. Policy uncertainty, including “taper”-related fears and the recent dysfunction in Washington have continued to impede growth in the United States.
Below are the video and some excerpts from a recent interview BlackRock CEO Larry Fink did with Bloomberg Television. The interview here is mostly about the effect of the government shutdown and debt ceiling crisis on the economy and financial markets and on this score Fink said there was a negative impact.
Summary: Below are some brief thoughts on the consequences of the US government shutdown and its aftermath. In general, I believe the consequences are more likely to be political and long-term without any significant short-term implications outside of a 0.5% drop in in annualized quarterly US GDP growth.
A last minute deal was struck that re-opens the US federal government and removes the immediate threat of default, but rather than turn the attention from the US, the focus has shifted from fiscal policy to monetary policy. In particular, the Beige Book yesterday underscored the economic uncertainty sparked by the government shutdown. This coupled with the recent string of private sector data, such as the ADP jobs estimate, ISM, auto sales, some regional Fed surveys and consumer confidence point to some loss of economic momentum. In turn, more investors recognize that the Fed is unlikely to begin any tapering this year.
Summary: I expect the debt ceiling impasse to be overcome today as a result of a Senate-brokered deal. With this manufactured crisis out of the way, we can concentrate on earnings and on the economy. While US growth is on track, I expect earnings growth to be weak and growth to ebb from this point in the cycle forward.
There is much about the US fiscal melodrama that is a farce. Unlike other debt crises, this one is totally self-inflicted. It is a crisis of choice not necessity. The misconstructions have been repeated so many times that they have taken on a life of their own. October 17 most certainly does not represent the deadline on a US default.
Summary: According to press accounts, the Senate could vote on a plan to end the government shutdown and avert a default on U.S. government debt as soon as tonight. Nonetheless, we are clearly in the 11th hour and must consider default a real possibility.
While data is difficult to come by, there are signs that the sharp drop in consumer confidence since the federal government shutdown (see post) is translating into weaker consumer spending.
US CDS is based on treasuries (linked to a specific security – the co-called “reference obligation”), which according to the official offering document (see offering circular here), do not have a “grace period”. Under such circumstances sovereign CDS documents dictate that the grace period is three days before an event of default is declared.
The US dollar is narrowly mixed against major and emerging market currencies. Comments by House Speaker Boehner that he will form a majority bloc to avoid a default by the Federal government is being understood two ways.
A reader recently asked me what I thought about the effect the government shutdown would have on asset markets. Obviously, I have no crystal ball but here are some thoughts.