Week in Review: Debt Ceiling Talks Stall

Market concern eased late in the week, with investors less worried that the U.S. Department of the Treasury will default on its debt in early June. On Thursday, investors were buoyed by comments from Speaker of the House of Representatives Kevin McCarthy, who said he hopes to have legislation raising the debt cap on the House floor in the week ahead. Then on Friday morning the high stakes talks over raising the debt limit appeared to stall before resuming in the Capitol on Friday evening. One of the toughest sticking points in the talks has been the question of spending caps, a key Republican demand but a red line for a significant bloc of Democrats.

US retail sales rose 0.4% in April, after falling by 0.7% the prior month and below consensus expectations at its slowest year-over-year pace (1.6%) since early in the pandemic. Core sales, which strip out sales of autos, gasoline, building supplies and food services, rose 0.7%, beating expectations for a 0.3% rise while industrial production rose 0.5% in April, well above expectations, driven in part by increased auto manufacturing.

Shares in Europe advanced amid optimism that interest rates could be close to peaking and that the U.S. would avoid a debt default. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 1.79% higher while the UK’s FTSE 100 Index was flat on the week.

The European Commission raised its forecasts for eurozone economic growth this year and next, while predicting that inflation would remain stubbornly high. The latest projection calls for gross domestic product (GDP) to expand 1.1% this year and 1.6% in 2024, up from the previous forecast for growth of 0.9% and 1.5%, respectively.

The UK’s unemployment rate crept up to 3.9% in the three months through March, from 3.8% in the three months through February, the national statistics office said. However, wage growth showed little signs of easing over the period. Average weekly pay excluding bonuses rose to 6.7% compared with a year earlier, from 6.6%.

Ukrainian President Volodymyr Zelenskyy arrived Saturday in Japan for diplomatic talks with leaders of the world’s most powerful democracies participating in the Group of Seven (G-7). The G-7 have so far decided against imposing a near-outright ban on exports to Russia and will instead look to widen existing sanctions and restrictions on key Russian sectors, such as manufacturing, construction, transportation and business services.

According to the final presidential election results announced by the Supreme Election Court, the incumbent President Recep Tayyip Erdogan received 49.5% of the vote in the first round of voting in Turkey’s presidential election last Sunday versus 44.9% for his main opponent, Kemal Kilicdaroglu. The voter participation rate was high, as expected, with about 88%, or over 56 million voters, casting ballots. Erdogan is expected to defeat opposition leader Kemal Kilicdaroglu in the runoff between the two on Sunday, 28 May.

U.S. equities were higher this week, with the S&P 500 Index gaining 1.65%, and the Nasdaq Composite gaining 3.04%. It was the best weekly performance since March for both indexes, while the Dow added 0.38%.

Japanese equities reached their highest levels this week since its equity market burst in 1989. Improved corporate governance, solid domestic earnings and renewed interest on the part of foreign investors have bolstered share prices so far in 2023 while Q1 GDP growth of 1.6% doubled economists’ forecasts. The benchmark Nikkei 225 Index gained 4.8% for the week.

In China, official data showed industrial output, retail sales, and fixed asset investment grew at a weaker-than-expected pace in April from a year earlier. Nevertheless, the Shanghai Stock Exchange Index managed a gain of 0.34% for the week while in Hong Kong, the benchmark Hang Seng Index declined 0.90%.

Market Moves of the Week:

In South Africa (SA), Eskom’s warning on Thursday to brace for the grim prospect of having to slash as much as 8,000 megawatts from the grid to prevent a complete blackout will put further pressure on SA’s already fragile economic growth prospects this year. Loadshedding (rotational power cuts) has been estimated by the South African Reserve Bank to slash as much as two percentage points from economic growth.

South Africa’s unemployment rate in the first quarter of 2023 was recorded at 32,9 %, among the highest in the world. According to the Quarterly Labour Force Survey (QLFS), this is an increase of 0,2 of a percentage point compared to the fourth quarter of 2022. The youth remained vulnerable in the labour market, with the first quarter of 2023 results showing that the total number of unemployed youth (15-34 years) increased by 241 000 to 4.9 million, while there was an increase of 28 000 in the number of employed youth to 5.6 million during the same period.

S&P Global Ratings has given SA the benefit of the doubt by keeping the outlook on the country’s rating at stable, after a surprise drop in early March when it moved it from positive. S&P did not issue a report with the announcement, which came late on Friday.

The announcement of Eskom’s winter plan, which showed that rotational power cuts could be ramped up to Stage 8 as well as last weeks accusations of SA selling weapons and ammunition to Russia, continued to weigh on sentiment towards the rand with the currency touching a fresh low on Friday, before closing at R19.42 against the US dollar.

The JSE all-share index was marginally down on the week (-0.2%), with all the major sectors softer, apart from rand hedge counters that are benefiting from the weaker rand.

In the week ahead, the SA Reserve Bank (SARB) is also expected to announce yet another interest rate hike of between 25 and 50 basis points. A 50-basis point hike has become more likely given the recent sell-off in the rand as well as consumer inflation that remains stubbornly above the SARB’s target range of 3%-6%.

Chart of the Week:

The debt ceiling, set by Congress, caps how much the U.S. can borrow to pay for its remaining bills. As per the chart above the national debt has grown significantly since the early 1980s under both Republican and Democratic administrations. The largest percentage increases to the debt occurred under Presidents Ronald Reagan and George W. Bush, both of whom enacted tax cuts that led to large deficits. Flashpoints that greatly contributed to the debt over the past 50 years include the wars in Iraq and Afghanistan, the 2008 financial crisis and the more recent 2020 COVID-19 pandemic.