Debt ceiling and default

The deadline in the debt ceiling showdown in Washington approaches, with a government shutdown possible on Friday, Oct. 1. Democrats in the House have passed a bill that would avert a shutdown and suspend the debt ceiling temporarily, but that will go nowhere in the Senate without support from some Republicans.

Democrats have disagreements within their party as well over a $1.2T infrastructure bill and a $3.5T reconciliation bill. A temporary spending bill would need to pass Thursday night. Congress has raised the debt ceiling more than a dozen times in the last 20 years, with the last major face-off coming in 2011 between the GOP and the Obama administration.

"Today’s macro environment is very different from previous debt ceiling episodes over the past decade," BlackRock Investment Institute strategists led by Jean Boivin write. "An economic restart is underway in the U.S., and inflation pressure has increased amid pandemic-related supply disruptions." "This is in contrast with the debt ceiling showdown in 2011 that triggered a downgrade in the United States’ AAA sovereign credit rating by S&P just as the euro area debt crisis and worries about slower growth kept investors on their toes," Boivin says. "It also differs from 2018, when worries about U.S.-China trade tensions and their impact on the economy were flaring up."

Technical default: The deadline for the U.S. government defaulting on its obligations is further down the line, but not that far off. Without a suspension or raising of the ceiling, there will be a risk of default between Oct. 15 and Nov. 4, according to the Bipartisan Policy Center.

"Due to the unpredictability of cash flows - and thus, all debt limit projections - policymakers need to act in the coming weeks if they intend to ensure that all obligations of the U.S. government are paid in full and on time," the center's report says. That's something the two parties have never let happen and it's unclear what the impact would be to the full faith and credit of the United States and the economy.

In a worst-case scenario, Moody's Analytics says a prolonged standoff would cause another recession, this one akin to the financial crisis, with $15T in household wealth lost and 6M jobs lost.

"We believe Congress will ultimately reach an agreement to raise or extend the debt limit, but likely not until right before the Treasury exhausts its borrowing capacity," BlackRock's Boivin says. "The good news: Neither political party wants to see a technical default, and there are no calls for substantive spending cuts," he adds. "Hence we do not believe the debt ceiling represents a fundamental risk to the market."

"The risk: The timeline to resolve the debt ceiling is tight," he says. "Political brinksmanship appears likely, and any miscalculation could lead to a short-lived government shutdown that triggers market volatility."

Market impact: So far, the debt ceiling debate has taken a back seat on Wall Street to issues like the Fed, rising commodity prices, supply chain issues and China's Evergrande crisis. The S&P 500 (SP500) (NYSEARCA:SPY) snapped a two-week losing streak last week. And while Treasury yields have been rising, that's been more to do with the response to global central banks looking to remove accommodation.

"Risk assets could suffer temporary pullbacks after an extended run higher, but we favor looking through any volatility and staying pro risk over the next six to 12 months," BlackRock, who recently moved to Neutral in U.S. equities, says.

Bloomberg highlights a near-term risk to money market funds, as investors have tended to pull cash from those funds with the increase in risk of technical default that could hit T-bill prices. Those funds could turn further to the Fed's overnight reverse repo facility, which now stands at $1.28T. (2 comments)

U.K. gas shortage

BP (NYSE:BP) says panic buying has caused 30% of its 1,200 gasoline stations in the U.K. to run out of the two main grades of fuel. A lack of truck drivers began to hit some fueling stations earlier this week, and lines of vehicles formed at stations over the weekend as some motorists waited for hours to fill up tanks.

Royal Dutch Shell (RDS.A, RDS.B) also says it has seen heavy demand across its network, which has caused some stations to run low on some grades.

The government said it would issue temporary visas for 5,000 foreign truck drivers, but business leaders say it is not enough to solve a labor shortage that risks major disruption beyond fuel deliveries, including for retailers ahead of the Christmas season. (77 comments)

Gamification rules

Investor Michael Burry tweeted that his firm received a subpoena from the SEC in regard to GameStop (NYSE:GME). He deleted the tweet later with no explanation. The development adds intrigue to what may happen with the investigation after SEC Chairman Gary Gensler said earlier in the month that the agency was "pretty close" to releasing a report.

Burry-led Scion Asset Management reported owning a 2.4% stake in GameStop at the end of Q3 last year after starting to accumulate a position in 2019. However, Burry called the GME rally in January "unnatural, insane, and dangerous" and his public comments on the retailer supported a long-term bull thesis.

The SEC has been stepping up its focus on what it calls the "gamification" of trading, which some analysts see as a risk to Robinhood Markets (NASDAQ:HOOD). New rules could also slow down some of the meme rallies and the ability of hedge funds to front-run social sentiment moves. (112 comments)

Summers on crypto

"When you have large financial sums in secret, you have risks of money laundering, risks of supporting criminal activity, risk of innocent people being ripped off," former Treasury Secretary Lawrence Summers told Bloomberg in an interview.

The crypto market shouldn't be considered a "libertarian paradise" that is immune to government regulations, but enthusiasts would do well to embrace a regulatory framework on the industry, "not just for the protection of consumers but protection of themselves," Summers said. He compares the crypto industry's lack of regulatory oversight to that of the airline and automobile sectors, which wouldn't be viable without being regulated. (26 comments)

Today's Markets

In Asia, Japan -0.03%. Hong Kong +0.07%. China -0.84%. India +0.06%.
In Europe, at midday, London +0.26%. Paris +0.52%. Frankfurt +0.66%.
Futures at 6:20, Dow +0.32%. S&P +0.10%. Nasdaq -0.27%. Crude +1.22% at $74.88. Gold -0.31% at $1746. Bitcoin +0.9% at $43672.
Ten-year Treasury Yield +3.1 bps to 1.492%

Today's Economic Calendar

8:00 Fed's Evans: U.S. Economic and Monetary Policy
8:30 Durable Goods
9:00 Fed's Williams: “Culture: Culture Diagnosis and Behavior Change-Learnings from the Field”
10:30 Dallas Fed Manufacturing Survey
11:30 Results of $60B, 2-Year Note Auction
12:00 PM Fed's Williams Speech
1:00 PM Results of $61B, 5-Year Note Auction

Companies reporting earnings today »

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