Perspective: Morning Commentary for January 20

By: Arlan Suderman, Chief Commodities Economist

Fri, 20 Jan 2023, 14:28

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

January 20 – Stock futures moved quietly higher overnight as they bounced following this week’s sharp selloff. Recession fears linger, but the market has also been dealing with those fears for quite some time now. There’s some increased chatter about the U.S. debt ceiling, which we surpassed on Thursday, but traders continue to believe that Congress will come through with an increase in the debt limit at the last possible moment. The VIX is trading between 20 & 21 this morning, reflecting relative calm on Wall Street. The dollar index firmed to trade near 102.5 in early trade. Yields on 10-year Treasuries are trading near 3.46%, while yields on 2-year Treasuries are trading near 4.19%. Crude oil prices traded very modestly higher in overnight trade, while the grain and oilseed markets were generally mixed to weaker in quiet trade ahead of the weekend.

U.S. public debt topped $31.5 trillion overnight, exceeding the existing debt limit of $31.4 trillion, and continuing to grow. The Treasury Department will use accounting tricks to continue to meet obligations without default, which should by its estimates buy us time until June. Wall Street hasn’t shown a lot of concern to this point, because it knows that Congress always come through with an increase in the ceiling at the last possible moment. It’s raised the debt ceiling 78 times since 1960. The national public debt now equates to $94,223 for every U.S. citizen, or $246,867 per taxpayer, according to usdebtclock.org. The interest obligations on our federal budget for that debt is currently $521 billion per year, but that number is rapidly rising as the unpaid debt certificates are rolled at maturity to the current higher rate certificates now available. The Federal Reserve created money to purchase more than half these debt certificates during the pandemic. It’s now reducing its purchases to the tune of $1.14 trillion per year, whereas Congress is increasing the supply of debt certificates by roughly $1.5 trillion per year. That automatically puts upward pressure on interest rates as the market tries to find new buyers for these debt certificates, regardless of what the Federal Reserve does with its rate hikes.

What does the debt ceiling mean? It’s like the limit on your credit card. Let’s say that someone you know has a spending problem. They like to shop, putting purchases on their credit card until it hits the limit. But the credit card company gives that person the ability to raise their credit limit whenever they want to do so. I think that we’d agree that is not a healthy situation. Somebody is going to have to pay the price, and it’s probably going to be you and I in higher prices because that person eventually will not even be able to pay the interest on their credit card debt. Much of Washington buys into the academic theory prevalent among policymakers called Modern Monetary Theory. MMT is defined by Investopedia as, “a heterodox (contrary to traditional) macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending. Put simply, such governments do not rely on taxes or borrowing for spending since they can print as much as they need and are the monopoly issuers of the currency. Since their budgets aren’t like a regular household’s, their policies should not be shaped by fears of rising national debt.” In other words, no responsibility or accountability. How well is that working out for us? It’s one of the reasons that we have had so much inflation over the past 20 months, and one of the reasons why taming that inflation is going to require pain for the economy.

China has begun celebrating its annual Lunar New Year Holiday. The holiday is officially on Sunday this year, but it’s the highlight of the year within China, especially after being very limited in their ability to celebrate over the past several years due to the pandemic. Workers generally take off over the coming week, with some extending the holiday beyond that. This is a time when people travel back home to relatives and friends. As such, it’s also a time when we’ll likely see the current Covid outbreak reach any remaining places that the virus has thus far avoided, and we may see a new variant emerge as well. Regardless, China’s economy is rebounding rapidly. Consumers have been held back from spending for three years, and they are anxious to get back to “normal” life. China’s Ministry of Commerce reports that sales of food, beverages and clothing at key retail stores was up more than 20% month-on-month in the first 10 days of January. Today’s edition of China Direct, published by our Shanghai office, notes that restaurants in the big cities were well booked for New Year’s Eve dinner service. Look for the energy markets to take the lead in assessing China’s recovery. The world cut back energy output over the past year as the Ukraine war and recession fears took their toll. This may be the year of the return of energy demand in an environment where restoring output will have its challenges.

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