Domestic consumer travel was encouraging during China’s holiday period in early May – the first long break since the country’s economy reopened. Tourist numbers were up 20% on 2019 levels, and spending exceeded those same levels for the first time since the pandemic began. The rebound in consumer spending is set to continue in the coming months.
Swiss inflation is clearly on a downward trend and again came in lower than forecast in April. Consumer price growth stood at 2.6%, which is a more acceptable level for the Swiss National Bank. Excluding more volatile items like food and energy, consumer prices rose by just 2.2%.
The US jobs market is showing signs of cooling. On average, job creation figures were down over the past three months compared with year-end 2022. This trend, coupled with the gradual rise in new jobless claims, suggests that wage growth will soon return to more normal levels. This bodes well for US inflation.
The US debt ceiling needs to be raised once again
For more than a century now, there has been a ceiling on the total amount of debt that the US Treasury can amass with its creditors, including those on the financial markets. The debt ceiling was introduced during the First World War, when Congress set a maximum amount that the government was allowed to borrow. Since then, the ceiling has been raised on numerous occasions.
The accompanying legal process, which used to be a simple formality, has become more complicated in recent decades, often causing disputes between the two main political parties in the US. Republican lawmakers like to try and use the debt ceiling as a way to curb federal government spending. The crises in 1995, 2011 and 2013 – each under a Democratic president – are particularly well known. And this time around, Joe Biden looks set to face the same challenges as his Democratic predecessors.
The current federal debt ceiling is USD 31.381 trillion. That limit was reached at the beginning of the year, and until the ceiling is raised, the US Treasury has to draw on its reserves and use accounting tricks to keep the government ticking over. But time is running out, since the Treasury doesn’t have too many of those tricks left up its sleeve. Treasury Secretary Janet Yellen sounded the alarm a few days ago, citing the urgent need for a political compromise in order to raise the debt ceiling. The recent drop in tax revenues means that the Treasury might have trouble paying its bills from early June onwards.
This has once again raised concerns among investors about the possibility of a partial or total US default, although most experts believe that the Treasury won’t encounter any real problems until July or even August. Following Ms Yellen’s warning, members of the US administration and Republican Party representatives have been in contact to discuss the issue. Like in the previous crises, it’s possible that an agreement won’t be reached until the last minute, perhaps even after some federal services have been shut down. But no one – not even the Republicans – has any interest in triggering even a temporary default on US debt. USD yields suggest that bond investors have ruled out any risk of default, although premiums on credit default swaps (CDS) have been under pressure in recent weeks.
Europe – the big surprise of 2023
Central banks were in the spotlight last week. After the US Federal Reserve raised its benchmark rate, the European Central Bank, as expected, upped its rates by 25 basis points to 3.25%. Although Christine Lagarde gave no clear indication of what will happen next in terms of monetary policy tightening, she remains determined to fight inflation. So in the absence of any good news on that front or a financial mishap, we can expect one or two more rate hikes between now and July. At the same time, the
Fed’s rhetoric has become more moderate, suggesting that its tightening is nearing an end. That’s because the US is further along in the macro cycle than the eurozone.
Against this backdrop, European stock markets have continued to fare very well. What’s new is that they are outperforming even though the tech sector is riding high and financials are lagging behind because of fears about the banking sector. There are several reasons for this. The eurozone economy has so far proved much more resilient than expected, buoyed by the services sector. European banks are also more robust than their US counterparts.
And lastly, the Q1 earnings season has turned out to be extremely upbeat. Some time ago, we pointed out that investor sentiment towards European stock markets had turned bullish. That sentiment also cooled during the recent consolidation, which bodes well for the market’s future upside potential.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
