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On July 26, 2021
Optimism over global growth continues to dominate forecasts and a strong 2H is generally expected. While the accelerating spread in the Delta covid variant has caused considerable consternation and renewed downside risks, we suspect the virus will only dent growth.
Indeed, the increased vaccination rates, especially in the West, along with 1H momentum amid more fully opened economies and the pull from pent-up demand should help mitigate considerably the bearish impacts. Additionally, supply constraints are also easing in many areas. And most importantly, central bank accommodation will remain in place.
Though there has been increased worry over QE tapering, the risks from Delta are likely to delay any such moves from the FOMC or ECB. In fact, as seen in last week’s ECB stance, the bar for a tightening in policy has been raised.
The S&P 500 continues to rocket to new levels and hasn’t touched the 200MA since last June and we think it could correct at any moment. One of those triggers could be a government shutdown.
The current $28.5 trillion debt is the starting point as the two-year suspension of the debt ceiling occurred in 2019 but will expire at the end of July. Treasury Secretary Janet Yellen believes the federal government will hit its spending limit very quickly and said default is “unthinkable”.
Senate Minority Leader Mitch McConnel (R-KY) said Republicans will not support an increase to the U.S. debt limit. The Senator said, “I can’t imagine a single Republican in this environment that we’re in now — this free-for-all for taxes and spending — to vote to raise the debt limit.”
This makes me think there is a 50/50 chance of shutdown because Republicans appear to be unified against raising the debt limit. Inflation will be the reason why Republicans won’t immediately support increasing the limit….. but will most likely increase it on their terms. The limit could be increased through reconciliation, but the government will likely run out of money before it gets done. Hence why I think there is a good chance of a government shutdown.
The markets were modestly firmer heading into today. Wall Street benefited from the rally in European bourses after the dovish ECB’s stance. That added to renewed beliefs that the ECB and the FOMC will not decide to start tapering any time soon. The unexpected jump in jobless claims caused some jitters too but added to the dovish outlook on monetary policy. The NASDAQ was up 0.36%, with the S&P 500 0.2% higher yesterday. Treasuries were a little richer as well, on the same factors. Longer-dated rates were 2 bps lower at 1.278% on the 10-year and 1.914% on the 30-year. The 2-year was marginally lower at 0.200%.
We expect the markets to meander into the weekend, assessing recent positioning, along with monetary policy factors with the upcoming FOMC (Wednesday) following the ECB’s meeting, as well as uncertainties over the Delta variant and global growth. Today’s calendar is light, with just the flash July Markit manufacturing, services, and composite PMIs. The earnings slate slows to end the week but features Honeywell, NextEra Energy, American Express, Equinor, Roper Technologies, Kimberly-Clark, Schlumberger, Regions Financial.
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