News of the week summary - 06/11/2023

Massive issuance of US Debt to come

President Biden has recently signed legislation that suspends the federal debt ceiling, giving the Treasury Department the go-ahead to resume net new debt issuance after several months of disruption. Since mid-January, when the national debt reached $31.4 trillion, the Treasury has been using special accounting measures to meet federal payment obligations.

The bill Biden signed suspends the debt limit until January 1, 2025, which allows the Treasury to restore its cash levels to a sustainable state. The widening fiscal deficit has also put pressure on the Treasury to increase borrowing.

However, this situation is leading to significant consequences. The process of replenishing the debt, which could exceed $1 trillion in new securities, may drain liquidity from the banking sector, elevate short-term funding rates, and potentially tighten economic conditions, possibly pushing the economy towards a recession. Bank of America estimates that this issuance wave will have an economic impact equivalent to a quarter-point interest rate hike by the Federal Reserve.

The Treasury's forthcoming auction announcements will guide investors on the speed of the issuance increase. It plans to enhance the size of upcoming three-month and six-month bill offerings by $2 billion each in the coming week, and it has been progressively increasing its issuance of four-month debt.

 

Ex Co-CEO of failed First Republic appointed as head of Turkey’s Central Bank

Turkish President Recep Tayyip Erdogan has selected Hafize Gaye Erkan, a former co-CEO of First Republic Bank, as the new head of Turkey's central bank. This appointment signifies a potential shift away from ultra-low interest rates and continued government interventions to support the country's currency, the lira.

Erkan had a lengthy career in finance, with nearly a decade at Goldman Sachs and almost eight years at First Republic. She resigned approximately 18 months before the bank's collapse in May. Her challenge lies in working with a president who maintains a belief, contrary to mainstream economic theory, that lower interest rates lead to slower inflation.

This appointment has had an immediate impact on the lira, causing it to weaken by 1.5% to nearly 23.47 per dollar. Despite state bank interventions to support the currency, the lira has depreciated by over 20% this year, making it one of the worst-performing major emerging market currencies.

Erkan's ability to address inflation and attract portfolio investors hinges on the autonomy Erdogan grants her. In the past, Erdogan has fired central bank governors for tightening monetary policy, and he reiterated as recently as May 19 that interest rates should decrease further. Investors will be watching for a significant rate hike at the central bank's next meeting on June 22.

 

China’s exports slump raises economic worries

In May, Chinese exports witnessed their first drop in three months, amplifying risks in the world's second-largest economy, primarily due to weakening global demand. Official data revealed that overseas shipments shrank by 7.5% compared to the previous year, reaching $284 billion, a result much worse than the median forecast of a 1.8% decrease. Exports to numerous destinations, including the United States and Southeast Asia, declined significantly.

In contrast, imports fell by 4.5%, surpassing the anticipated drop of 8%. This resulted in a trade surplus of $66 billion. Notably, imports from Taiwan and South Korea declined by over 20%, indicating a slump in global electronics demand.

The export growth earlier in the year had been a positive factor supporting China's economic recovery after the relaxation of pandemic restrictions. However, recent data suggests a weakening recovery, with May witnessing a contraction in manufacturing activity and a slowdown in home sales growth after an earlier uptick.

This disappointing trade report has raised concerns about economic growth, intensifying expectations for more policy support. Economists predict China's exports will contract for the entire year. There is growing speculation that Beijing may need to implement additional stimulus measures to bolster growth, including a possible cut in the reserve requirement ratio for banks or even an interest rate cut.

One bright spot for Chinese exporters has been strong global demand for Chinese cars, particularly electric vehicles, which have been very popular overseas. In May, total vehicle shipments reached a record of $9 billion, underlining the sustained demand.

The government has set a relatively conservative growth target of around 5% for the year, which most economists believe can be achieved despite the recent slump in activity. Notably, consumer spending on travel and restaurants has fueled the economic recovery, while industrial activity lags.