US: Debt Ceiling Agreement Reached

Two businessmen shaking hands

At the close of business last Friday, global equities were slightly higher on the week amid uncertainty over the US debt limit. Although, a rush for artificial intelligence-focused stocks sparked a US rally late in the week. The yield on the US 10-year Treasury note hit its highest level since the regional banking crisis emerged in early March, rising to 3.81%, indicating investors are falling in line with the US Federal Reserve’s “higher-for-longer” messaging. The price of a barrel of West Texas Intermediate Crude remained steady at $72.75. The Cboe Volatility Index (VIX) was likewise range bound, at 18.70.



With everyone talking about “Open AI” these days, our federal and provincial governments are working together to investigate the technology. What they are concerned about is the disclosure of personal information. The issue is that ChatGPT disclosed personal information without consent. This raises concern over how malicious software could be used to harm Canadians going forward. Open AI is a US research and development company co-founded by Microsoft’s Peter Thiel and Elon Musk.



Am I the only one who is fed up with the yearly tradition of the Republicans and Democrats having to go through the motions before they can agree to increase the debt ceiling to cover expenses already agreed to in both chambers? House Speaker Kevin McCarthy must now get the legislation passed through the House, and then it goes to the Senate for their rubber stamp. Finally, it will go to President Biden, who will make it law.

Having depleted its general account in order to stave off default, the US Treasury is expected to issue one trillion dollars’ worth of Treasury bills and notes in the six months after the debt limit is raised. Combined with ongoing quantitative easing, liquidity conditions are expected to tighten significantly in the second half of the year. This will continue to bring inflation down in the coming months.



Inflation in the United Kingdom fell less than expected in April, to 8.7% year over year from 10.1%. Economists had expected CPI to fall to 8.2%. Core inflation rose 6.8%, hitting a new cycle high. After the data, investors priced in an additional half-point of rate hikes by the Bank of England.



The Mexican government has seized a rail line from Group Mexico, a move that has shaken investor confidence. Mexico has been a major beneficiary of the nearshoring trend and has attracted significant foreign investment in recent years, though such flows could be imperiled if such nationalizations continue.

The Reserve Bank of New Zealand increased the cash rate 0.25% to 5.5%, but signalled a pause in its hiking cycle.

Chinese officials said the country firmly opposes a trade deal recently agreed between the US and Taiwan.

This past week, the Chinese CSI index erased all of its 2023 gains due to worries about the yuan’s devaluation, troubles for property developers, and slower economic growth. Geopolitical conflicts and worries over government debts are adding to the problem.

Prince Abdulaziz bin Salman warned short sellers of more pain ahead of OPEC+ meeting. However, later in the week, Russia pushed back against production cuts.



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