We have seen this tactic before, the United States Congress, once again, is playing a game of chicken with the credit worthiness of the United States (US) debt. While recent history has shown that lawmakers eventually strike a deal, the recurring brinkmanship is unnerving and seemingly unproductive.
Key themes for this week include:
- Lawmakers risk a US default
- China’s April industrial production disappoints
- US big-box retailers appear resilient
- Commodities struggle against a strong dollar
- The greenback stages a comeback
AN AGREEMENT NEXT WEEK?
The US debt ceiling is the Congressional limit on the amount of outstanding federal debt the US government can incur. The US government does not generate sufficient tax revenue to fund its spending obligations and like most governments it needs to borrow money to fund the ‘deficit’. The US government deficit has averaged around $800 billion annually since 2001, including the 2020/21 financial year, when the combined deficit reached $5.5 trillion driven by pandemic-related spending. At this rate of deficit spending, it is no surprise that in January 2023 the US government reached its debt ceiling of $31.4 trillion (around R600 trillion).
Since February, the US Treasury Department has relied on the Treasury General Account (TGA) to fund government spending until a debt ceiling extension agreement is reached. The TGA, however, is only a cash reserve and panic recently ensued over the TGA’s balance which had been drawn down to $87 billion, as of this Monday, from its opening balance of $560 billion in February. According to the US Treasury Secretary, Janet Yellen, the Treasury will deplete its cash reserves by 1 June 2023, also referred to as ‘X-date’, which raises the chances of a US government debt default for the first time in history.
A similar stand-off occurred in 2011 when Congress agreed to raise the debt ceiling only days before the deadline, which led to the S&P downgrading US credit from AAA to AA+. This suggests that even if a bipartisan deal is reached before X-date, the tactics exercised by Congress may lead to unexpected and negative consequences. Since 1960, Congress has raised the debt ceiling 78 times, often as a routine exercise, but recent history has seen lawmakers use the debt ceiling as a platform for political manoeuvring which has led to several eleventh-hour resolutions. Optimism emerged in the US market on Thursday as the Speaker of the House of Representatives, Kevin McCarthy, hinted at a possible Congressional vote next week to raise the debt limit.
DATA IN A NUTSHELL
US retail sales, excluding auto and fuel prices, rose 0.6% month-on-month in April ahead of surveyed economist expectations, furthermore, the retail sales for the control group increased 0.7% month-to-month also ahead of expectations. The latest US Department of Labour weekly Initial Jobless Claims report showed 242,000 claims which was 22,000 below the previous week, marginally lower than expectations. Lastly, US housing stats grew 2.2% month-on-month against expectations of a decline.
China’s economic data releases this week, however, did not inspire confidence. Industrial production in April improved by 5.6% year-on-year which was well below expectations of a 10.9% increase, while retail sales growth also came in short of expectations, up 18.4% year-on-year. The market has retired its high expectations of a linear China recovery in 2023 with some international banks downwardly adjusting their Chinese gross domestic product growth forecasts for 2023.
In the United Kingdom (UK), the number of workers on an employer’s payroll declined by 136,000 in April according to data published by the Office for National Statistics. The decline disappointed market expectations of a 25,000 increase in payrolls and inched the UK unemployment rate up 0.1% to 3.9%.
Statistics South Africa reported a 1.6% decline in real retail sales in March 2023 which was below expectations of a 0.2% decline. Apparel sales were surprisingly resilient increasing 6.3% year-on-year, however, the general retailer category which forms the bulk of overall retail sales fell 1.9% after a 1.5% decline in February, signaling a pull-back in unit sales or a change in the sales composition towards value-for-money alternatives.
RETAILERS CAP EARNINGS SEASON
Retail giant, Walmart’s first quarter results showed solid operating leverage performance as revenue growth of 7.6% year-on-year was outpaced by earnings growth of 13.1% year-on-year, both ahead of expectations. Target Corporation, a more discretionary retailer, reported unchanged same-store revenues and a decline in online revenue, however, its reported earnings were ahead of market expectations. While Target kept its previous guidance unchanged, Walmart raised its profit forecast, highlighting the former’s higher reliance on consumer confidence and discretionary spending.
In China, e-commerce retailer, Alibaba, reported its first-ever revenue decline in its cloud business, while group sales grew 2% year-on-year for the fourth quarter, in line with expectations. Alibaba’s announcement that it plans to separately list its cloud business did little to sway the market as its shares fell as much as 6% when US markets opened. Crucial to South African equity holders was the earnings report from Tencent. The Chinese internet conglomerate reported first quarter revenues of 11% year-on-year and adjusted operating profit that beat estimates, though disappointing advertising revenues offset bright spots from the strong sales momentum in its gaming and fintech businesses.
The S&P 500 Index climbed 1.55% during the week, realising most of its gains during Thursday’s trade as the market gained confidence around the resolution of the debt ceiling impasse. The FTSE 100 Index, Hang Seng Index and JSE All Share Index all lost ground over the course of week falling 2.0%, 1.4%, and 3.3% respectively.
GOLD LOSES ITS SHINE
The Bloomberg Industrial Metals Index (BCOMIN) was down 1.1% for the week by Thursday after it see-sawed in response to China’s weak industrial activity data and amid a mid-week rally in the US dollar. Iron ore futures brushed off China’s negative news flow to increase by 7.4% to $106/tonne. So far, iron ore has retraced 24% of its losses following its 2023 peak of $130/tonne in mid-March. Brent Crude oil prices rose 2.8% this week trading at $76.30/barrel on Thursday after the International Energy Agency (IEA) increased its oil demand forecast on Tuesday. The IEA raised its demand forecast by 200,000 barrels per day citing the record demand from China.
Gold prices have been buoyed by the heightened macro-economic and financial sector risks in the past two months peaking at $2 050/ounce, however, the precious metal fell to the $1 950/ounce range this week as a resolution to the debt ceiling debacle began to materialise.
DOLLAR STAGES A COMEBACK
The pound sterling struggled against dollar strength this week with the backdrop of poor jobs data in the UK, contrasting the generally positive economic data out of the US. With several factors affecting UK sentiment this week, it is difficult to tell whether the pound will retrace back to above £1.25/$ or if its relative strength was a temporary condition while the US sorted out its spending limit issues. The pound rapidly declined to trade close to £1.24/$ on Thursday.
The South African rand remains under immense pressure this week failing to break below the R19.00/$ level. During Thursday’s trade the rand reached a low of R19.49/$ as the broad commodities complex pulled back. The Australian dollar, another commodity-driven currency fell to A$0.6612/$. The Australian dollar has struggled to regain its footing after it’s stellar ascent in January to A$0.71/$ capitulated as optimism around China’s recovery began to wane.