Political Theater, Debt Crisis Looms

As the debt ceiling crisis looms, Washington officials issued a stark warning: Raise the ceiling or there will be consequences. According to the White House, financial markets would lose faith in the U.S., the dollar would weaken and stocks would fall. The Biden administration has also insisted on bipartisan action, but with the government poised to run out of money 12 days from now,?“desperate times may call for desperate measures.”

According to Treasury Secretary Janet Yellen, if the debt ceiling is not resolved by October 18, a default would?"likely precipitate a historic financial crisis that would compound the damage of the continuing public health emergency, as well as triggering a spike in interest rates, a steep drop in stock prices and other financial turmoil."

According to reports, Senate Majority Leader Chuck Schumer plans to force a Senate vote today on whether to take up a measure suspending the limit until December 2022. Republicans, however, have promised to block the measure, thus likely resulting in more political theater as opposed to a viable solution. President Biden, meanwhile, is scheduled to lead a meeting of CEOs and other market leaders on the debt ceiling and?“the economic effects of a delay.”

Historically, raising the debt ceiling has been a matter of procedure but more recently officials on both sides have used the debt ceiling as a means to negotiate particular agendas or specific agenda items. Congress has raised the debt ceiling more than a dozen times in the last 20 years, with four temporary government shutdowns in the process. The longest was during 2018-2019 and lasted 34 days.

At this point, Republicans and Democrats remain at odds over the broader outlook for government spending. Republicans are insistent that after trillions deployed during the crisis?“enough is enough.”?Democrats, however, are pushing full force for further government initiatives, backing President Biden’s proposed $3.5T human infrastructure initiative.?The divide remains over a number of issues such as: significant tax increases, including raising the top marginal income tax rate from 37% to 39.6%, $109B in tax-payer funded college tuition potentially including non-citizens, lowering the Medicare eligibility age from 65 to 60, as well as increased reporting requirements for banks to help fund the plan including requiring banks to report transaction data for any account with at least $600 of inflows and outflows annually.?

Meanwhile, fears of inflation, a government impasse, slowing growth and rising interest rates continue to weigh on markets. In fact, according to a new survey by Allianz Life, 54% of American investors report they are worried that a big market crash is on the horizon.

Yesterday equities ended broadly higher as the Dow gained 311.75 points, or 0.92%, to close at 34,314.67, the S&P 500 rose 1.05% to finish at 4,345.72 and the Nasdaq Composite rallied 1.25% to close at 14,433.83.

Yields also rose with the 10-year rising 5bps to close at 1.53% and 30-year also rising 5bps to close at 2.10%.?

This morning, however, equities are down 0.4% with the Dow at 34,189.10 as of 9:41 a.m. ET.

The 10-year is down 1bp, trading at 1.52%, while the 30-year is down 2bps at 2.08% as of 9:42 a.m. ET.

Yesterday, the U.S. trade balance widened 4.2% from $70.3b to a record $73.3b in August. According to?Bloomberg, the balance was expected to widen to $70.8b in the second month of Q3. Good and services imports rose 1.4% to a record $287b in August, as the U.S. imported $3b more consumer goods during the month, mostly due to pharmaceuticals, toys, games and sporting goods.?Exports, meanwhile, climbed 0.5% to $213.7b.

Also yesterday, the ISM Services Index unexpectedly rose from 61.7 to 61.9 in September, a two-month high. According to?Bloomberg, the index was expected to decline to 59.9 at the end of Q3.

In the details, prices paid rose from 75.4 to 77.5, a two-month high, business activity improved from 60.1 to 62.3, and backlog of orders increased from 61.3 to 61.9 in September. Additionally, new orders gained from 63.2 to 63.5, a two-month high. On the other hand, employment fell from 53.7 to 53.0, supplier deliveries decreased from 69.6 to 68.8, exports declined from 60.6 to 59.5, and imports dropped from 48.7 to 47.7, a one-year low.

This morning, ADP reported that private-sector employment rose by 568k in September, more than the 430k rise expected, according to?Bloomberg, the largest monthly gain since June’s 741k rise.

Tomorrow, initial jobless claims are expected to decline from 362k to 348k in the week ending October 2, a three-week low, and consumer credit is expected to rise by $17.500b in August, following a $17.004b increase in July.

The key release, however, will be Friday’s September nonfarm payrolls report. According to?the consensus forecast, nonfarm payrolls are expected to rise 488k in September, up from the 235k rise reported in August and a two-month high. Also, the unemployment rate is expected to decline from 5.2% to 5.1%, and average hourly earnings are expected to rise 0.4% in September and 4.6% over the past 12 months, up from the 4.3% increase reported in August. Additionally, wholesale inventories are expected to be unrevised at the 1.2% increase reported in August, a two-month high.

-Lindsey Piegza, Ph.D., Chief Economist