US economy set to soften in second half
US economy set to soften in second half
Huw Davies analyses the implication of the US debt ceiling deal on the markets and the economy.
There is no denying that this round of debt ceiling negotiations has been the most fraught since 2011. However, the realisation that a delay in a deal would have potentially catastrophic and unpredictable consequences for US and global equity markets appears to have brought the two sides to the table. Both Democrats and Republicans have made compromises to secure a deal that pushes debate of this subject to the other side of next year’s US presidential election.
Short term, this will undoubtedly create a further relief rally for risk markets, given the removal of a significant tail risk. However, we now move from a period where the Treasury has been drawing down their general account (by the order of $360bn in the first five months of this year) to now needing to build its balances back up. To what extent they build this back up is open to debate, but they will want to run a significantly higher margin than has been the case recently and may well want to take it back to the US$ 600 – 650bn that it averaged in early 2022. This will likely be through a significant rise in US T-bill issuance and the debate will be around how quickly they want to restore the previous healthy margins for the general account, especially when there is an ongoing withdrawal of liquidity also from quantitative tightening.
The debt ceiling agreement does lead to a reduction in spending, but estimates point towards this effect being around a 0.1 – 0.2% decrease in GDP over the next 2 years. However, the probability is that the resolution of negotiations has moved the Treasury account from being a significant stimulant to the US economy to a significant drain. Combined with the marginal, though still negative effects of the spending cuts, the US economy, which was surprisingly robust the first half of this year, looks set to soften into the second half.
Short term, this will undoubtedly create a further relief rally for risk markets, given the removal of a significant tail risk. However, we now move from a period where the Treasury has been drawing down their general account (by the order of $360bn in the first five months of this year) to now needing to build its balances back up. To what extent they build this back up is open to debate, but they will want to run a significantly higher margin than has been the case recently and may well want to take it back to the US$ 600 – 650bn that it averaged in early 2022. This will likely be through a significant rise in US T-bill issuance and the debate will be around how quickly they want to restore the previous healthy margins for the general account, especially when there is an ongoing withdrawal of liquidity also from quantitative tightening.
The debt ceiling agreement does lead to a reduction in spending, but estimates point towards this effect being around a 0.1 – 0.2% decrease in GDP over the next 2 years. However, the probability is that the resolution of negotiations has moved the Treasury account from being a significant stimulant to the US economy to a significant drain. Combined with the marginal, though still negative effects of the spending cuts, the US economy, which was surprisingly robust the first half of this year, looks set to soften into the second half.
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This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested.
The views expressed are those of the Fund Managers at the time of writing and are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.
Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. Issued in Hong Kong by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission.
No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK.
*In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.