US debt ceiling issue remains unresolved

Daniel Richards - MENA Economist
Published Date: 05 October 2021

 

  • The debt ceiling crisis in the US shows no signs of abating just yet, as President Biden laid the blame Republican Senate leader Mitch McConnell’s door during a White House press conference. The President played up the seriousness of the situation, saying that any failure to resolve the issue and a subsequent debt default would ‘undermine the safety of US Treasury securities’ and ‘threaten the reserve status of the dollar as the world’s currency.’ Treasury Secretary Janet Yellen has said that the US could run out of money to cover its bills by October 18. Republicans are wary of appearing to support the government’s large spending plans, preferring that the Democratic Party pushes the spending through as a budget reconciliation issue.
  • Turkish CPI inflation accelerated to 19.6% y/y in September, up from 19.3% the previous month. This was broadly in line with consensus projections. The monthly rate was 1.3%. Energy costs were a key driver of the price rises. PPI inflation remained highly elevated at 44.0%, albeit modestly slower than the 45.5% the previous month. Core inflation, which is now the key metric for the central bank, was 17.0% y/y, up from 16.8% in August.
  • Lebanon and the IMF have restarted discussions around a potential support package, with the finance ministry issuing a statement saying it was looking for a ‘fair and comprehensive’ deal with its creditors. Lebanon defaulted on its debt last March, precipitating a currency collapse and economic turmoil. Talks with the IMF had begun last year, but a protracted political impasse meant that there was little progress.
  • The Reserve Bank of Australia kept its benchmark interest rate on hold at 0.1% in a meeting this morning. The MPC sees the impact of supply chain related inflation as limited. We also had final PMI data for Australia this morning, with the composite index staying level with the previous month at 46.0. Protracted lockdowns have weighed on the Australian economy in recent months.
  • Regional PMI surveys are due out today. We will be publishing a separate note on these.

Today’s Economic Data and Events

  • 18:00 US ISM services index (Aug) forecast -59.9

Fixed Income

  • US Treasury yields rose across the curve overnight as the pop in oil prices on the back of OPEC+’s decision to keep output plans steady helped to fuel inflation concerns. Yields on the 2yr UST added a bit more than 1bps to 0.2776% while the 10yr gained almost 2bps to settle at 1.4789%, giving back some moves higher earlier in the day.
  • The UAE has mandated banks for its first federal level bond which will be a multi-tranche USD-denominated issuance. Alongside the dollar bond, the UAE federal government will also issue a Formosa bond with proceeds to be used for capital spending and to be allocated to a sovereign wealth fund. Individual emirates have in the past issued their own Eurobonds and this first federal bond will take the credit rating of UAE which Fitch rates at ‘AA-‘.

FX

  • The dollar nudged lower for a third day running, down almost 0.3% to 93.776 as a degree recalibration took hold of markets. A deepening political standoff between the Biden administration and Republicans over the US debt ceiling will sour near-term risk appetite.
  • EURUSD managed a gain of around 0.2% to settle at 1.621 while GBPUSD jumped 0.47% to 1.361. We expect that the moves higher would be largely short-lived and don’t necessarily change a near-term trajectory of dollar strength as the Fed moves closer to normalizing policy. USDJPY also moved in favour of the yen, falling 0.11% to 110.93.
  • Commodity currencies were well supported thanks to the large move higher in oil. USDCAD fell almost 0.5% to 1.2589 while both AUD and NZD added around 0.3% to 0.7281 and 0.6969 respectively. AUD will be in focus in early trade today as the RBA is expected to keep policy unchanged.  

Equities

  • Inflation and growth issues continued to hit equity markets at the start of the week, with most major global indices remaining under pressure. In the US, the tech-heavy NASDAQ which is particularly exposed to any growth concerns, lost -2.1%, with the more broad-based S&P 500 losing 1.3% and the blue chip Dow Jones -0.9%.
  • In Europe, the FTSE 100 lost -0.2%, with losses offset by some oil companies benefitting from the rise in prices. The CAC lost -0.6% and the DAX -0.7%.

Commodities

  • OPEC+ maintained its plan to add 400k b/d per month for November at least, disappointing markets who appeared to be hoping for a larger increase to accommodate the current shortages in global energy markets. The statement from OPEC+ after the meeting was brief and there was no follow up commentary from oil ministers, leaving the oil market a little in the dark as to how OPEC+ is actually viewing the current move in prices. OPEC+ will meet again at the start of November to decide output levels for December and may choose that as an opportunity to increase output if prices remain high.
  • Oil futures jumped higher in response although the moves weren’t particularly excessive and held to around a single standard deviation’s worth of daily price moves since 1990 in the Brent market and around half of one in WTI. Brent futures added 2.5% to USD 81.26/b while WTI added 2.3% to USD 77.62/b, warding off fears that prices could have jumped to as much as USD 85/b or higher in the Brent market. Time spreads continue to be tight with 1-2 month spreads in the Brent market holding at around USD 0.80/b while in WTI the same spread is around USD 0.30/b.

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