Debt Ceiling Deal

Is This a Win or a Loss for Americans?

Latest Details

On Saturday evening, reports emerged that Republican House Speaker Kevin McCarthy and President Joe Biden had reached an ‘agreement in principle’ to raise the US debt ceiling. A briefing between House Democrats and Republicans is taking place tonight, and we can expect ongoing details of the bill to hit newswires in the coming hours.

“The agreement represents a compromise, which means not everyone gets what they want. That’s the responsibility of governing.”

– Biden

Speaker McCarthy believes the deal is a win for the American people and that “there’s not one thing in the bill for Democrats”. He is also confident that after hitting the House floor, the bill will be passed within the assigned 72-hour timeline. Congress will vote in favour of or against it on Wednesday.

The package includes a two-year budget deal that would hold spending flat for 2024 and impose limits for 2025. The debt limit would be increased for two years and not reviewed again until after the next election.

What’s in the debt ceiling deal?

  • Spending: The deal holds nonmilitary spending roughly flat for the 2024 fiscal year, and sets a 1% cap on spending increases for the 2025 fiscal year. After that, the deal includes spending targets that aren’t enforceable.
  • Military Spending: Military spending in fiscal 2024 would be roughly at the level of Biden’s fiscal 2024 budget request, according to sources familiar with the matter, which would amount to a 3% increase. 
  • Work Requirements: The White House agreed to a key GOP demand – tightening work requirements for federal aid, primarily by temporarily raising the top age threshold in the Supplemental Nutrition Assistance Program, or SNAP. It does not, however, apply to Medicaid. 
  • Energy Projects: The deal requires that a single federal agency take charge of a project’s environmental review, assuming responsibility for the review’s timeline. At present, multiple agencies often perform their own, individual environmental assessments, which extends the review process. Both sides agree that faster approval of key projects is beneficial. (Source)

While McCarthy is confident the bill will pass, there are plenty of dissenting views and outright disgust over the notion of its contents. Here’s a selection sample:

Economic Calendar

Highlights

  • JOLTS Job Openings – Wednesday
  • ADP Employment Change – Thursday
  • ISM Manufacturing PMI – Thursday
  • Nonfarm Payrolls + Unemployment Rate – Friday

Breakdown

JOLTS Job Openings – Wednesday

Job openings have been on a downtrend since December, and that’s projected to have continued in April. If the number comes in as expected, it should have minimal market impact. A big upside surprise, however, could shift rate hike odds even higher than the current 65% for June.

ADP Employment Change – Thursday

Private businesses in the US created 296K jobs in April of 2023, which trounced expectations of 148k and way was well ahead of the 142k in March. As usual, it’s being reported the same week as Nonfarm Payrolls, and can act as somewhat of a lead-in to that data.

April’s number was the strongest employment gain since July of 2022, with pay gains slowing sharply and fewer people choosing to switch jobs. May’s gains are forecast to have slowed, while holding above the March figure.

ISM Manufacturing PMI – Thursday

ISM Manufacturing PMI is one economic indicator that has really been struggling. April’s slight uptick wasn’t enough to break the downtrend, and it’s projected to have remained in contraction in May. Higher borrowing costs and tight credit have damaged manufacturing activity and increased the risk of a recession in the coming months.

Nonfarm Payrolls + Unemployment Rate – Friday

This is the hallmark event for the week, next to the ongoing debt ceiling saga. The consensus 195k would be a full 58k below April’s figure, and this could be a key data point that tips the scale one way or another for a June rate hike. A number well above 200k could more firmly solidify the idea of a 25bps in early June.

Unemployment has been oscillating between a tight range of 3.4-3.7% over the past 12 months, and is expected to come in at 3.5% for May. An expansion above the top of that range in coming months is something to look out for.

Earnings

Here’s the names to keep on the radar for the week.

The most anticipated earnings releases scheduled for the week are CrowdStrike #CRWD, Salesforce #CRM, C3.ai #AI, Zscaler #ZS, Dollar General #DG, Broadcom #AVGO, lululemon athletics #LULU, Okta #OKTA, Advance Auto Parts #AAP, and Macy's #M.

That’s all I’ve got for today. To my American friends, enjoy the Memorial Day festivities! Cheers. 🇺🇸

Jay Charles

Editor in Chief, The Trading Tank.

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