US Debt Ceiling – Blessing in Disguise?
January 27, 2023
Last week the United States hit its $31.4 trillion debt limit, forcing the Treasury to begin implementing extraordinary measures to avoid a default on US debt. The extraordinary measures should buy Congress roughly 5-6 more months, before reaching the “X-Date”, the date on which the extraordinary measures are exhausted. In the meantime, all eyes look towards congress in anticipation of what will be one of the most crucial market-related policies debated this year.
Debt limit discussions are not a new topic for congress, as congress has successfully raised the limit 75 different times in the past 60 years. However, the process has become increasingly more contentious and difficult over the past decade. Republicans will look to push through a debt level increase accompanied by stipulations of future spending cuts. Whereas the Democrats, including the White House, are emphatic that they will only support a debt limit increase that has zero strings attached. As the drama and stalemate begin to unfold over the next couple of months, there is also the possibility of the bill being brought to the floor via a “discharge petition”. A lengthy and cumbersome process that would require a couple of House Republicans to cross the aisle and vote with all 212 House Democrats. No matter the means of resolution, the process is sure to be lengthy and contentious.
As Congress begins working through a resolution to raise the limit the Treasury will continue to implement its extraordinary measures to meet debt obligations. In doing so, they will be spending down the Treasury General Account, which is a liability on the Fed’s balance sheet. Once the debt ceiling is lifted -we expect sometime in July or August before the X-date- the cash level in the TGA will be restored, thus decreasing bank reserves. Due to the potential stress this could put on liquidity, we believe the Fed may end its quantitative tightening process early, resulting in a positive catalyst for equity markets.
Existing home sales fell 1.5% m-m to 4.02mn units (SAAR-seasonally adjusted annual rate) in December, finishing 2022 with the worst annual decline since 2008. December marked the eleventh consecutive sequential drop in existing home sales, which are now down 34% y-y. Existing home sales for the full year 2022 fell 17.9%. This material decline reflects housing affordability challenges due to still elevated home prices and the spike in mortgage rates; as the Fed tightened monetary policy in order to curb inflation. Weak home sales activity is exacerbated by low available supply. This is because ~85% of US homeowners have a mortgage rate below 5%, which is making it less likely for them to sell.
Home prices have decelerated since a peak in early spring of 2022 and the Case Shiller Home Price Index was up 9.2% y-y in October compared with 20.8% y-y growth in March. The median home price fell for the sixth consecutive month, but prices are still up 2.3% y-y. A contributing factor to resilient home prices is inventories, which remain near all-time lows. The monthly supply of single-family existing homes for sale fell to 2.9 homes in December – which is well below a balanced market of ~six months of supply. We expect home price appreciation to slow in 2023 and we anticipate larger declines in the new home market as builders reduce prices to stimulate sales.
In our view, a material decline in broad inflation measures and a Fed policy pivot by the end of 2023 will enable a significant decline in mortgage rates, which is currently the most important driver of the housing market. We see signs in high-frequency data (such as mortgage applications filed for purchase) that housing demand could be bottoming in 2023 as mortgage rates have stabilized and have started declining (e.g. the 30-year U.S. fixed-rate mortgage declined recently from 7% to 6.5%). Lastly, we remain confident in the long-term demand story for homeownership as there is a shortage of housing in the US, with demand outpacing supply by 565K units in the past five years.
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The S&P CoreLogic Case–Shiller Home Price Indices are repeat-sales house price indices for the United States. There are multiple Case–Shiller home price indices: A national home price index, a 20-city composite index, a 10-city composite index, and twenty individual metro area indices. These indices were first produced commercially by Case Shiller Weiss. They are now calculated and kept monthly by Standard & Poor’s, with data calculated for January 1987 to present. The indices kept by Standard & Poor are normalized to a value of 100 in January 2000.