Global Markets On Edge With Both Sides Holding Firm In Debt Ceiling Negotiations

Barry Adams
12 May, 2023
New York City

Markets are finally focusing on the lack of progress in finalizing the U.S. Federal government debt ceiling as lawmakers of both parties remain at odds. 

President Joe Biden and congressional leaders postponed the closely watched meeting on Friday because neither side saw the reason to meet.  

The U.S. lawmakers raised the debt limit by $2.5 trillion to a total of $31.4 trillion on December 16, 2021. 

On January 19, 2023, that limit was reached, and the Treasury announced a “debt issuance suspension period” and began using “extraordinary measures” to borrow additional funds without breaching the debt ceiling.

The U.S. Treasury is expected to exhaust all measures sometime in the first two weeks in June, and if the debt limit is not increased or suspended the U.S. government will default on its obligation. 

That default will not send the U.S. stock market in tailspin but also spike Treasury yields and send shockwaves to financial markets with unpredictable consequences. 

"If the debt limit remains unchanged, there is a significant risk that at some point in the first two weeks of June, the government will no longer be able to pay all of its obligations, said the nonpartisan Congressional Budget Office. 

The extent to which the Treasury will be able to fund the government’s ongoing operations will remain uncertain throughout May, even if the Treasury ultimately runs out of funds in early June. 

That uncertainty exists because the timing and amount of revenue collections and outlays over the intervening weeks could differ from CBO’s projections," added the CBO in its latest report released Friday. 

At heart of the impasse is the lack of agreement in which government programs should be funded and which programs need to be cut or completely eliminated. 

President Joe Biden has insisted on raising the debt limit without any preconditions and House Speaker Kevin McCarthy has demanded cuts in government spending paired with the debt ceiling revision. 

Markets are hoping that the both sides may work out a small deal to avert government default that will keep the U.S. government functioning till the year-end. 

With no debt deal in sight, Treasury yields are expected to surge and stocks face more headwinds next week. 

 

U.S. Import and Export Prices Rebounded In April 

U.S. Import prices in April rose 0.4% form the previous month, the U.S. Bureau of Labor Statistics reported Friday. 

Import prices rose for the first time in four months and increased to the most since May 2022. Import prices of fuel increased 4.5% after 5.7% higher petroleum costs and 17.4% decline in natural gas prices. 

On a yearly basis, import prices declined 4.8% in April, matching the rate in March.     

Nonfuel import prices were unchanged in April, after decreasing 0.5% the previous month. Foods, feeds, and beverages prices increased 0.2% in April following a 0.9% decline in March.

U.S. export prices increased 0.2% in April, after declining 0.6% in the previous month. 

Higher prices for nonagricultural exports and agricultural exports in April each contributed to the overall increase. 

The price index for U.S. exports fell 5.9% from a year ago in April, the largest over-the-year drop since a 6.7% fall in May 2020.

 

U.S. Indexes & Yields 

The S&P 500 index increased 0.5% to 4,111.18 and the Nasdaq Composite increased to 0.7% 12,248.02. 

The yield on 2-year Treasury notes increased to 3.99%, 10-year Treasury notes edged up to 3.46% and 30-year Treasury bonds held at 3.78%. 

Crude oil fell $0.87 to $69.99 a barrel and natural gas prices rose 8 cents to $2.27 a thermal unit. 

 

U.S. Stock Movers 

Regional banks were in focus on the final day of the week as they have been for the last two months. 

PacWest Bancorp fell 2.5% to $4.60, Western Alliance Bancorp increased 0.4% to $27.01 and Zions Bancorporation dropped 1.5% to $22.30. 

On Thursday PacWest reported additional 9.5% deposit outflow in the second quarter to May 10 after the closure and sale of First Republic Bank.  

Tesla Inc edged up a fraction to $172.0 after chief executive Elon Musk appointed a new chief executive for Twitter Inc.  

NBC Universal chief Linda Yaccarino is expected to lead Twitter in six weeks and Elon Musk will remain as chairman and chief technology officer of the social media platform. 

Musk has been under fire from Tesla shareholders for handling multiple companies and being distracted from managing the electric vehicle maker. 

First Solar Inc soared 22.6% to $224.46 after the company agreed to acquire Sweden-based Evolar AB for up to $80 million. 

The company makes thin films used in solar panels to improve efficiency. 

The efficiency of conventional silicon-based solar cells has stagnated at around 20% and the market has become highly commoditized over the last decade. 

Evolar claims its PV Power Booster increases solar cell efficiency by 25% compared with conventional silicon-based solar panels,

 

Luxury and Financial Stocks lift European Indexes 

European markets traded higher on the final day of a volatile week. 

Benchmark indexes hovered near record highs supported by advances in financial and luxury products makers.  

Trading sentiment was also supported by optimism that the U.S. Federal Reserve would pause rate hike at its next meeting in June after consumer price and wholesale price indexes cooled in April. 

Luxury products makers traded higher after Richemont SA reported record quarterly results on the back of a sharp rebound in China. 

Insurance companies traded higher after strong quarter results lifted stocks of special insurance and property and casualty companies. 

 

French Consumer Inflation Accelerated In April

In domestic economic news, French consumer prices accelerated in April to 5.9% from 5.7% in March.

The French statistical agency INSEE confirmed the preliminary estimate in a release Friday. 

This increase in inflation resulted from an acceleration in prices of energy to 6.8% from 4.9% in March, services to 3.2% from 2.9% and tobacco to 9.4% from 7.8%. 

On the other hand, the prices of manufactured goods slowed to 4.6% from 4.8% in March and food to 15.0% from +15.9% respectively.  

On a monthly basis, price increase slowed to 0.6% in April from 0.9% rise in March. 

Core inflation, which excludes food and energy, increased to 6.3% from 6.2% in March. 

 

UK Economy Barely Expanded In First Quarter 

The U.K. economy expanded for the second quarter in a row matching the growth rate in the previous quarter, the Office for National Statistics reported Friday. 

GDP rose 0.1% in the first quarter from the fourth quarter of 2022, matching the rate in the previous quarter. 

Construction sector led the growth with a rise of 0.7% followed by a 0.5% increase in manufacturing and 0.1% in the service sector. 

Consumption remained weak after aggregate household spending was unchanged because elevated inflation squeezed income. 

However, gross fixed capital formation increased 1.3% but public expenditure declined 2.5% and weak international trade after exports fell 8.1% and imports declined 7.2%. 

 

Europe Indexes & Yields 

The DAX index increased 0.5% or 87.02 points to 15,921.90, the CAC-40 index rose 0.9% or 65.08 points to 7,446.09 and the FTSE 100 index advanced 0.3% or 24.63 to 7,755.15. 

The yield on 10-year German Bunds inched down to 2.24%, French bonds traded slightly lower to 2.82%, the UK gilts inched lower to 3.74% and Italian bonds decreased to 4.13%.

The euro edged higher to $1.091, the British pound to $1.253 and the Swiss franc to 89.28 cents.

Brent crude increased 26 cents to $75.23 a barrel and the Dutch TTF natural gas increased €0.74 to €34.25 per MWh.

 

Europe Stock Movers 

Allianz SE increased 0.1% to €211.90 after the German insurance company reiterated its full-year 2023 outlook and reported a rise in first quarter net income. 

Societe Generale SA increased 1.3% to €22.13 after the French bank reported a decline in French retail banking business but international business advanced at a faster pace. 

SCOR SE jumped 9.6% to €25.79 after the French property and casualty reinsurance company reported better-than-expected earnings. 

Beazley PLC advanced 4.7% to  614.0 pence after the specialist insurance company reported high gross written premium in the March quarter. 

Richemont SA gained 5% to CHF 156.95 after the Swiss luxury watch company reported record annual earnings from continuing operations after sales rose in all regions of the world. 

Nordex SE decreased 0.9% to €10.62 after the German wind turbine company reported a wider first quarter loss because of higher operating costs. 

THG PLC plunged 9.7% to 67.32 pence after the e-commerce company ended its talks to go private with Apollo Global Management.