Jean Boivin, Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Kurt Reiman, Senior Strategist for North America and Nicholas Fawcett, Member of the Economic and Markets Research Team, all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
The U.S. needs to soon raise a self-imposed federal debt limit, or the “debt ceiling”, to avoid a debt default. We don’t see fundamental risks from the debt ceiling showdown – with a low risk of technical default and limited chance of a temporary government shutdown. Yet the twists and turns could trigger jitters in markets that have had an extended run higher. Still, we favor looking through any volatility and stay pro-risk over the next six to 12 months.
The Congress has acted to adjust the debt ceiling 78 times since 1960, according the Treasury Department. Over recent decades the debt ceiling has become a subject of intense partisan wrangling. A two-year debt ceiling suspension expired in July, and the Treasury Department said its “extraordinary measures”, or maneuvers to manage cash and debt in order to avoid breaching the debt limit, could run out next month if Congress doesn’t act. So far we have only seen modest movements at the front end of the Treasury yield curve – in line with market reaction ahead of recent debt ceiling deadlines with the exception of 2017. See the chart above. We see today’s unique market dynamics as contributing to the muted signal from the Treasury market. The Federal Reserve’s near-zero policy rate has intensified the hunt for yield, just as the central bank has become a large buyer of Treasuries. In addition, banking regulations since 2008 have helped broaden the buyer base for Treasuries.
Today’s macro environment is very different from previous debt ceiling episodes over the past decade. An economic restart is underway in the U.S., and inflation pressure has increased amid pandemic-related supply disruptions. We uphold our tactical pro-risk stance as the restart broadens out, and what we call the new nominal – a more muted reaction from central banks to higher inflation than in the past – is also supportive of risk assets. This is in contrast with the debt ceiling showdown in 2011 that triggered a downgrade in the United States’ AAA sovereign credit rating by S&P just as the euro area debt crisis and worries about slower growth kept investors on their toes. It also differs from 2018, when worries about U.S.-China trade tensions and their impact on the economy were flaring up.
How will the debt ceiling showdown affect the prospects of Congressional spending plans? We believe it will unlikely derail the $1 trillion bipartisan infrastructure bill or the Democrats’ proposed $3.5 trillion spending plan on social policy and climate change - key legislative priorities ahead of the 2022 midterm elections. Yet we do expect the $3.5 trillion price tag on the Democratic-sponsored reconciliation package to be scaled down to help ensure the support of party moderates, who have balked at some of the proposed tax increases for corporates and high-earning individuals to offset spending.
We believe Congress will ultimately reach an agreement to raise or extend the debt limit, but likely not until right before the Treasury exhausts its borrowing capacity. That may come in late October or early November, but the timing is hard to estimate due to lumpy Treasury cash flows for Covid relief payments. The good news: Neither political party wants to see a technical default, and there are no calls for substantive spending cuts. Hence we do not believe the debt ceiling represents a fundamental risk to the market. The risk: The timeline to resolve the debt ceiling is tight. Political brinksmanship appears likely, and any miscalculation could lead to a short-lived government shutdown that triggers market volatility.
Bottom line: We expect Congress to ultimately reach an agreement on the debt ceiling, and see the odds of the federal government committing technical default –or violating terms of its debt - as low. Risk assets could suffer temporary pullbacks after an extended run higher, but we favor looking through any volatility and staying pro risk over the next six to 12 months. We recently downgraded U.S. equities to neutral on a tactical basis to fund an upgrade to European equities, as we see the baton of global restart being passed on to Europe from the U.S.; we remain underweight U.S. government bonds.
The U.S. consumer price index (CPI) showed a slower pace of price increases in August, thanks to a moderate rise in core components and falling prices in Covid-related items such as airfares and car rentals. Yet price pressures appeared to grow in some non-Covid items, suggesting a broadening and more persistent inflationary pressure.
Sept 20 – Canada federal election
Sept 21-22 – Fed, Bank of Japan policy meetings
Sept 23 – Euro area flash consumer confidence indicator; Bank of England policy decision; flash composite purchasing managers’ index (PMI) for the euro area, U.S. and UK.
Central banks return to the limelight this week amid rising and more persistent inflationary pressure. Yet we do not expect the growing price pressure to lead to an earlier policy rate liftoff from the Fed. PMI data from key developed economies could shed light on the impact of the delta variant surge on activity restart.
BlackRock's Key risks & Disclaimers:
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 20th, 2021 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.
Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.
This information has been accurately reproduced, as received from BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.
The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.