When will Treasury be unable to pay US government bills in 2023?

Currently predicted date is somewhere between mid-May and the start of June:
home.treasury.gov/news/press-releases/jy1454

Why does this matter to us?

1. Historically, debt ceiling showdowns have not led to Treasury defaults, but they offer valuable insights for predicting financial market impacts, even when an agreement is reached in time.

2. The Treasury’s measures to delay default affect market liquidity, with these impacts typically lasting beyond the deal itself.

3. In the lead-up to debt ceiling deadlines, the Treasury’s cash balances tend to drop, and then spike once an agreement is reached, draining market liquidity . 

4. The way in which  the debt ceiling is raised has significant consequences. For example, the 2011 S&P 500 decline resulted from a political agreement that included larger-than-anticipated spending cuts and growth downgrades.

5. The uncertainty surrounding debt ceiling negotiations is more pronounced than in previous instances (Chart III), and it cannot be overlooked since even successfully avoiding default can trigger outcomes with far-reaching and unforeseen consequences.

6. The ongoing debt ceiling negotiations may prompt the Federal Reserve to resume bond purchases, which could potentially pump up asset prices, but long-term effects are uncertain. See “Operation Twist” on one of the included charts.

7. Debt ceiling negotiations are more than just raising the spending limit. They also involve the budget process, spending cuts, and potential growth of market sectors.

Slippery Situation: OPEC+'s Influence on Oil Prices Gets Murky

The recent OPEC+ decision to cut oil production has raised questions about its long-term impact on inflation and global economic growth. Although the move initially led to a 6% rally in Brent crude, market reactions suggest that traders and investors are growing increasingly skeptical about the influence of OPEC+ in the oil market.

Higher oil prices, once considered favorable for stocks, are no longer perceived as such, with the relationship between oil and long-term inflation projections becoming more complex. In fact, the 10-year bond market breakevens and the oil price have been closely connected since the Global Financial Crisis (GFC). Interestingly, the recent OPEC+ announcement led to a 2.2 basis point drop in the 10-year breakeven rate, which now stands at 2.305%. This implies that the market remains convinced that inflation is under control.

The market's response to OPEC+ action demonstrates a shift in perception, with traders doubting the ability of oil producers to sustain prices through supply limitations. Furthermore, the supply-driven spike in oil prices is different from a demand-driven one, with the former potentially leading to a downturn in growth. Analysts argue that the OPEC+ move is fundamentally defensive, responding to falling prices and revealing underlying bearish factors. This suggests that the group's role as a "price-responder" rather than a "price-maker" may be indicative of its waning influence in the oil market. In the context of an increasingly multipolar world, these insights underscore the complexity of global economic interactions and the challenges faced by nations in balancing fluctuating oil prices, growth, and inflation concerns.

The Risk of a Commercial Real Estate Crisis: Banks' Solvency, Office Space Conundrum, and Economic Ripple Effects

The Commercial Real Estate (CRE) sector is under enormous pressure right now. If banks' solvency comes into question, the situation could take a turn for the worse, leading to a series of ripple effects on the broader economy. A key area of concern is commercial real estate lending, particularly by mid-sized banks, which have doubled their CRE lending since the global financial crisis. According to Chris Watling of Longview Economics, mid-sized banks ($10 billion to $250 billion in assets) have a null.3 trillion CRE loan book, while the largest banks ($250 billion+ in assets) have $738 billion.

This means that the banks under the most pressure are also the most exposed. The pandemic has changed the way we work, with remote work and aversion to commuting becoming increasingly popular. As a result, the demand for office space is likely to decrease, leading to higher vacancy rates.

This shift in office space usage is also evident in the stubbornly low subway traffic in cities like New York. For example, the Metropolitan Transportation Authority's subway traffic remains about a third below pre-pandemic levels.

While this isn't yet a solvency crisis, the risk of it becoming one lies within the commercial property sector. As businesses continue to retrench and adapt to new working conditions, banks with significant exposure to CRE lending could face difficulties, potentially leading to a broader economic impact.

Here are some of the potential consequences of a CRE crisis on the broader economy:

• Economic Slowdown Intensifies: A CRE crisis can make the economic slowdown even worse. Remember the 2008 financial crisis? Property values tanked, people lost their jobs, and spending took a nosedive.

• More Financial Trouble for Banks: When the CRE sector is in trouble, banks and financial institutions can feel the pain too. This could lead to a credit crunch and a deeper recession.

• Everybody Feels Less Wealthy: When CRE values drop, businesses and investors feel less wealthy, which can lead to less confidence and investment.

• Governments Feel the Pinch: A CRE crisis can hit government finances pretty hard, as seen during the 2008 financial crisis when governments around the world had to step in with stimulus measures and bailouts.

• Spillover Effects: The CRE crisis can impact other parts of the economy too, leading to job losses and financial trouble across all sorts of industries.

• Tough Choices for Policymakers: Central banks and policymakers can have a hard time dealing with a CRE crisis when they're also trying to fight inflation and rate hikes.

In summary, the evolving work landscape and its effects on the CRE sector pose a significant risk to banks, particularly mid-sized banks with substantial exposure to commercial real estate lending. Policymakers and financial institutions must carefully monitor and address these risks to mitigate the potential consequences on the broader economy.