Debt Ceiling

The debt ceiling is a legal limit on how much debt the U.S. Treasury is allowed to issue. The government breached that limit on Jan. 19, after which it scrambled to find cash elsewhere to keep the lights on. The Treasury Department estimates it will exhaust those “extraordinary measures” as early as June 1 — a date that could change depending on difficult to predict factors like tax payments from last month’s filing deadline.

After June 1, the government would be at risk of defaulting — or missing payments on its debt. 

Bond Markets have fully pricing in zero chance of a default. Credit default swaps have gone vertical. Is this time different ?

Inflation expectations

With the slow 25bps hikes by FED, ECB and AUS the central banks are letting inflation expectations get entrenched. Kill it (inflation) and kill it now.

The apparent resilience of economies to higher rates suggest that those with a bucket load of debt get killed (mortgages, cars) whilst consumers with no or little debt are encouraged to spend what money they have or earn. Rates on deposits are lower then inflation and why not spend the money now as it'll buy less in the future. No wonder that super sticky bank deposits are flying elsewhere.

Banking Crisis

Relief on Friday as PacWest Bancorp and other regional shares blasted back but we're still a long way down and nothing has changed.

In Case You Missed It

US Non-Farm Payroll

FED Press Conference

ECB Press Conference

RBA Press Conference

Australia

Australia's budget has the country much more interested than usual, as there is a promise of cost-of-living relief yet equally a promise of hard times ahead. From CBA:

Budget 2023 - Tuesday 9th May

The Federal Government has “the difficult challenge of meeting multiple goals” when it hands down the 2023/24 Commonwealth Budget next Tuesday 9 May, says Commonwealth Bank of Australia’s Chief Economist Stephen Halmarick, while a sharply lower budget deficit is expected.

In a 2023/24 Budget Preview report published by CBA today, Mr Halmarick forecasts a significant reduction in the 2022/23 budget deficit to approximately $A5bn (0.2% of GDP), well below the previous estimate of $A36.9bn (1.5% of GDP) as stronger-than-expected nominal GDP growth this year is boosting revenue and lowering spending.

“The Government has the difficult challenge of meeting multiple goals: maintaining fiscal discipline to assist monetary policy in bringing inflation back to the 2%-3% target range, providing some targeted relief to cost of living pressures, putting in place new arrangements to reverse the projected blowout in spending on a number of large programs, implementing the AUKUS defence policy priorities, further developing climate change policies, implementing some tax reform and moving the medium term budget outlook onto a more sustainable footing,” Mr Halmarick writes.

The report also highlights potential policy/spending initiatives in the 2023/24 Budget may include:

• Relief to household power bills
• Significantly increased defence spending
• NDIS reform and restructure
• An update to the cost of Stage Three tax cuts

The report also sees this improved budget position flowing into 2023/24, although a less positive outlook for following years. “The Government is expected to revise up their nominal GDP growth forecast for 2023/24 – largely on the back of a reported upgrade in commodity price forecasts,” Mr Halmarick comments.

Thanks to CBA for the preview - more detail here

That's an insanely difficult budget balancing act for a rookie treasurer in a new Government. And a Labour Government at that.

AUD / USD Trade Update

Short 0.7000

Short 0.7100

Stop 0.6825

Positive carry

I am going to stop saying it's going down. In reality we are in a rectangle trading pattern waiting for a break either way.

USD is the key driver at this point rather than any weakness in AUD. The de-dollarisation lobby and well known investors shorting the dollar, has muddied the waters.

In reality, the enormous and misunderstood eurodollar market is the driver of the value of USD and any de-dollarisation process would first require all those entities borrowing eurodollars over the last 30 years, to buy USD to cover their obligations.

This Week's Economic Indicators [London time]