Stagflation is now the concern of the United States: MacroSlate Weekly

The US economy grew at an annualized rate of 1.1% in the first quarter of 2023, which was slower than expected and is expected to reach 1.9%. Stagflation is now a concern for the United States; this GDP print was significantly lower than the previous two quarters, 2.6% and 3.2%, respectively.

Next week’s FOMC meeting, which will take place on May 3, is expected to raise rates another 25 basis points, bringing the federal funds rate to 5.00%.

United States

Debt ceiling drama

What is the debt limit? According to the United States Department of the Treasury, it is “The debt limit is the total amount of money that the United States government is permitted to borrow to meet its existing legal obligations, including Social Security benefits and health insurance, military salaries, debt interest, tax refunds and other payments.

According data from 1960 and corroborated by Lyn AldenCongress raised the debt ceiling 78 times, which was raised by Democrats and Republicans 29 and 49 times, respectively.

You may have heard the news that the United States is approaching the debt ceiling, which has created uncertainty in the market. The base case scenario and what we expect is that the US debt ceiling is raised and it kicks the box out on the road; this game of chicken will most likely continue until the eleventh hour. We have previously pointed out that the Treasury General Account ran out, heading towards 0, which dislocated the market.

However, Democrats and Republicans are far from in agreement. Democrats insist on raising the debt ceiling with no strings attached. Republicans are calling for spending cuts.

The longer this lasts, the greater the pressure on the financial markets, which can best be seen in the spread between one- and three-month US Treasuries. The difference between the two returns should be zero. As you can see, the demand for 1-month US Treasuries, which mature before the US Treasury runs out of cash, is 3.759%. At the same time, 3-month Treasury bills are likely to default unless Congress raises the debt ceiling, which yields 5.154%. Investors are worried about the potential for a default, the sooner the Treasury will no longer be able to pay its bills would come as early as June, but we think the ceiling will be raised.

US Treasuries are the foundation of the entire financial system, so a permanent default would disrupt the entire system. However, a small temporary default would hit US credit, which can be seen with the US 5-year CDS spread at its highest levels since 2009.

Bank of the First Republic

Why would the regional banking crisis be over when rates are still rising and high? First Republic Bank shares are nearly down 95% over the past six months. As the federal funds rate nears 5%, deposit flight is a real problem for banks. The First Republic Bank has reported a huge outflow of deposits.

The crisis could worsen if the FDIC or a private organization does not find a solution. According to Macro Investment, if FRB’s held-to-maturity assets are sold, the losses realized on those assets would offset the value of its equity. It is more likely that the Fed and the Treasury will have to organize a rescue plan similar to that of Credit Suisse.

Great Britain

The BOE is not responsible for inflation

UK public sector borrowing has increased each year, totaling £21.5bn, or 5.5% of GDP, resulting in a deficit of £21.53bn. Additionally, interest charges soared more than 47% from a year ago to more than £106.6 billion.

It’s been a week to forget for the policymakers in charge, who quite frankly need to go back to school and understand the fundamentals of the economy. Deputy Governor Ben Broadbent adamantly denied that money printing during covid resulted from this runaway inflation. He blamed the cost of importing energy.

From one incompetent policymaker to another, chief economist Huw Pill went on to say this week that people in the UK “need to accept that they are worse off and stop trying to maintain their power to ‘actual purchase’. He blames people for pushing for higher wages contributing to higher inflation. He also expects inflation to come down to 2% over the next two years. He can now be added to the “inflation is transitory” team with Jerome Powell.

Japan

The Bank of Japan met again on Friday and unsurprisingly embarked on a stimulus-focused approach to maintain yield curve control on the 10-year bond. As a result, this sent the yen and yields significantly lower.