C8 Bulletin: Gauging the Impact of US Debt Limit Dynamics – Part II

In February, one of our index providers, IVI Capital, outlined how the Debt Ceiling impasse would lead to an expansion of US liquidity, and more benign financial markets, until the Congressional stand-off was resolved. With the Debt Ceiling increase finally agreed, we asked IVI for an update (below).

In our update from 22 February 2023, IVI highlighted that as the US reached the debt ceiling, the US Treasury’s own reserves, held in the Treasury General Account (TGA) at the Fed, would need to be drawn down to fund government spending. The TGA run down from USD 490bio on 22 February to just USD 23bio on 5 June effectively injected additional liquidity into markets. This countered the effect of Quantitative Tightening (QT) as the Fed shrinks its balance sheet, albeit at a far slower pace than it was expanded. In effect, this acted as a stimulus on markets still suffering from an excess of liquidity generated by unprecedented expansion of US fiscal spending and the Fed’s balance sheet in response to Covid.

Now the debt ceiling impasse has been resolved, the TGA will need to be rebuilt.  Treasury has indicated this will be done by issuing bills, and we estimate the rebuild will be approximately USD500 billion over the next 3 months (most occurring in June/July). In addition, we are projecting the heavy seasonal deficit over that time frame to be USD600 billion, which also needs to be financed. This implies roughly USD1.1 trillion in new net marketable borrowing by Treasury.

The chart below shows the relationship between Nasdaq 100 (in blue) and our liquidity gauge using the Fed’s Balance Sheet adjusted for both RRP (Fed’s reverse repo facility) and TGA (in orange). Note in December 2021, the Fed’s adjusted balance sheet started to contract from a peak of USD 7.1trillion and Nasdaq peaked too and began to fall.  But, since October of 2022, the adjusted Treasury balance sheet has RE-EXPANDED as the US government’s cash balances (TGA) have been run down. Now the agreement has been reached, this liquidity tightening risks a more rapid slowdown in the US economy in the second half of 2023, very much at odds with the current market pricing of immaculate disinflation and much lower volatility.

After a strong performance in 2022, the IVI Global Macro Index is broadly flat on the year. However, given some well-publicised reversals in macro trading in 2023, the cautious approach they recommended in February looks well founded.

Other posts

Thoughts From The Divide: Natural Disasters?

BY JON WEBB
One might have expected yesterday’s CPI data to be of significance for asset prices. As it happened the figures were interesting, with the inflation data surprising to the high side: marginally, but still a miss, while core CPI actually increased for the 2nd month. Hardly proof of resurgent inflation but notable in the context of a series which has been trending lower since Sep 2022. But asset prices didn’t seem to notice the miss. Perhaps that’s because policymakers hardly noticed it either. The quote above came from the NY Fed Williams yesterday, and seems to be representative of policymakers’ focus shifting from inflation to the labor market. So perhaps markets took that cue and paid more attention to the rather striking weekly claims figure (258k). Read more →

C8 Weekly Bulletin:  Trendrating on US Bank Stocks

BY JON WEBB
C8 Technologies are delighted to announce that Trendrating will be adding 7 US and European equity indices to C8 Studio. They have been working with investors over the past 10 years to enhance equity portfolios, using a proprietary methodology which focuses on determining the ongoing trend in individual equities. Trendrating have just produced a timely report on US bank stocks which they have kindly allowed C8 to share. This illustrates that, whilst the Silicon Valley Bank failure had idiosyncratic issues, investors perceive a much wider problem with smaller US banks.  Read more →

NDR Fixed Income Allocation Strategy December 2022 Update

BY BRIAN SANBORN
The NDR Fixed Income Allocation Strategy, Positioning Update Read more →
Back to all posts →