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

Day Hagan/NDR Smart Sector® with Catastrophic Stop Strategy September 2023 Update

BY BRIAN SANBORN
Day Hagan/Ned Davis Research Smart Sector® with Catastrophic Stop strategy, model and allocations update. Read more →

Thoughts From The Divide: Particularly Fluid

BY JON WEBB
Now a week out from the Fed making it clear that the squeeze of lower growth isn’t worth the juice of bringing inflation back to (not toward, Jerry!) 2%, Mohamed El-Erian summed up the state of play nicely in a recent article for the FT. The Queens’ College president noted that, “It is not often that you see a reputable central bank revise up its inflation and growth projections and yet strengthen a dovish tilt to its policy stance. Yet that is what happened in Washington last week when the Federal Reserve raised those projections up a notch and yet delivered two consequential signals – a willingness to tolerate higher inflation for longer and an openness to slow the ongoing reduction in its balance sheet.” Read more →

NDR Dynamic Allocation Strategy March 2023 Update

BY BRIAN SANBORN
Dynamic Allocation Strategy, indicators, weightings update Read more →
Back to all posts →