US difficulties dominate the economic landscape

The noise

• Following the near-standstill in US government policymaking faced by the Biden administration during the debt-ceiling crisis in May, Congress is again considering the possibility of a shutdown. This time, Democrats and Republicans are split over the budget deal required to keep funding the US government until the end of the fiscal year. If no deal is reached by midnight on Saturday, government will shut down from Monday morning, putting the payment of federal employees, military personnel, and essential safety-net services at risk.

• After a three-year pause in repayments, graduates in the US will need to continue repaying their student loan debts as of next week. According to a report by Barclays earlier in the summer, nearly $16 billion of repayments will be due every month, in what amounts to a sharp awakening for US consumers. This comes in the wake of a period of surprising resilience from the US economy, following the pandemic and mini-banking crisis at the start of 2023, despite the continued raising of interest rates – which are now at a 22-year high – and persistent fears of recession.

• On Thursday, an investor selloff in European government bonds resulted in a marked increase in yields as prices fell. Italian prime minister Giorgia Meloni sparked this volatility when she announced the government’s fiscal deficit was larger than the market had anticipated, and that the Italian growth forecast had been reduced for this year and the next. The yield on a ten-year Italian government bond reached 4.96% at its peak following the increased deficit targets and reduced growth forecast for the next year. Fears also spread to UK and French government bonds which saw more modest yield increases.

​The numbers

GBP Performance to 28/09/2023

Source: Bloomberg, data as at 28/09/2023

The nuance

When it rains, it pours. Different challenges to the US economy have come to the fore concurrently. A second potential government standstill for the calendar year, squeezes on consumer wallets, a signal from the Federal Reserve that interest rates will remain “higher for longer,” and the price per barrel of crude oil nearing $100. As built-up consumer savings following the post-pandemic and stimulus packages in the US are reaching depletion, and as the cost of borrowing increases, the world’s largest economy is facing meaningful headwinds. Some of this has spilled over into Europe and is partially responsible for the current scepticism towards government bonds. Investors are now pricing in the prolonged restrictive monetary policies of central banks.

However, these issues should be put in the broader picture. Whilst consumer wallets will be impacted, the degree of this impact is less clear. Indeed, the predicted drag of the loan repayments on US growth is only 0.5%. Additionally, despite the increased prices, record energy demand would normally indicate economic strength, rather than weakness, and can fuel growth. The resulting picture, while certainly mixed, should not represent undue concern for markets overall.

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