Stagflation and the US debt ceiling worry markets

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The US economy grew at an annualized rate of 1.1% in the first quarter of 2023, which was slower than expected and was forecast to hit 1.9%. This has raised concerns about stagflation, as the GDP print was significantly lower than the previous two quarters.

In addition, the debt ceiling is another of the market’s worries, since the uncertainty about the agreement to increase it has increased the pressure on the financial markets.

The drama of the debt ceiling.

The debt limit is the total amount of money the US government is authorized to borrow to meet its existing legal obligations. According to data from 1960, Congress has raised the debt ceiling 78 times, while Democrats and Republicans have raised it 29 and 49 times, respectively.

Currently, the Democrats and Republicans are miles away from reaching an agreement on the debt ceiling, as the former insist on raising it without conditions, while the latter call for spending cuts.

This has increased pressure on financial markets and has been reflected in the spread between one and three month US Treasury bills. Investors are concerned about the possibility of a default, which can be seen with the US 5-year CDS spread at its highest levels since 2009.

The situation of First Republic Bank.

Rising interest rates in the United States have created problems for First Republic Bank. The deposit flight reported by the bank has generated a regional banking crisis.

If FRB’s held-to-maturity assets are sold, realized losses on these assets would wipe out the value of your equity. The Fed is more likely to intervene if the FDIC or a private organization cannot find a solution.

To end.

The US economy has presented lower-than-expected growth in the first quarter of 2023, which has raised concerns about stagflation. In addition, the uncertainty about the agreement to raise the debt ceiling has increased the pressure on the financial markets.

On the other hand, rising interest rates have created problems for First Republic Bank, leading to a regional banking crisis. The situation is uncertain and the Fed is expected to intervene if a solution to the problem is not found.

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