Paying the bills
Weekly Bond Commentary
By this point, nearly everyone has heard about the debt-ceiling debate in Washington—a sizable thorn in the market’s side. Negotiations continued last week, though most expected a deal again to be struck at the eleventh hour. Financial markets are certainly aware of the mess, taking heart when news indicated progress and being frustrated when a resolution remained elusive.
Simply put, debating raising the debt ceiling is like debating whether to pay your credit card bill. You have already bought the new furniture and taken that expensive trip, putting those charges on your card. Now you must actually pay for them.
Market anxiety was increased last week when Fitch placed its AAA rating of the U.S. government on watch, indicating a downgrade could follow. S&P actually did lower our AAA rating in 2011, citing the dysfunctional policymaking and political brinksmanship that had made governance less predictable. That decision disrupted markets at the time and left a permanent blot on the nation’s creditworthiness.
Against this backdrop, economic data released last week continued to be resilient. Weekly jobless claims rose slightly above last week’s level, to 229,000, but still remain historically very low, and April new home sales rose 4.1%, well above expectations of a 2.6% drop. Consumer spending rose 0.8% in April, again well above expectations, as the savings rate eased from 4.5% to 4.1%.
Probably more importantly, the Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures spending data for May, showed prices rising 0.4% from April and increasing 4.7% over the last year (the former was unchanged from April, with the latter’s growth a tick less at 4.6%). The final University of Michigan Consumer Sentiment survey (it’s taken twice per month) reinforced consumer concern about economic growth, the debt ceiling standoff and inflation. Over half of respondents said they thought the government is doing a poor job with economic policy, the worst reading since July 2022. In spite of that, consumers’ views of their personal finances changed little from April, with stable income expectations supporting their spending for the time being.
The next Fed meeting is on June 14, and markets are divided as to whether it will raise the fed funds rate or leave it in its range of 5-5.25%.