President Biden and the House Speaker have tentatively agreed on a debt ceiling deal.
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The price of the Dow Jones index rallied over 300 points to 33,105 last week as the debt ceiling negotiations gave hope. A further rally this week can see a target of 34,100 over the coming weeks.
House Speaker McCarthy said on Sunday that the deal House Republicans have reached with the White House would be “transformational” for the American public. However, he faces a rebellion within his party as the deal would add $4 trillion to the US debt without addressing the spending issues.
The fallout from a default would be “a million” times worse than the 2008 financial crisis, said Danny Blanchflower, an economics professor at Dartmouth University. “What happens if the greatest economic monolith in the world can’t pay its bills? The consequences are frightful.”
Carsten Brzeski, global head of macroeconomic research at Dutch bank ING, said there would be no “automatic reaction”. He said that the US could avoid a technical default for a few weeks by continuing to pay bondholders while cutting budget items, such as spending on social security benefits and healthcare. That would be a “breach” of the debt ceiling but not as bad as a default.
Stock Market Expected To Rally On Debt Ceiling Deal
Markets would still be weak but would not lead to “the mother of all crises,” Brzeski said.
US stock markets have seen over eight weeks of consecutive outflows as investors flee to global money markets. A successful debt ceiling deal could lead to a rebound in US stocks as those investors rush back.
The week ahead in economic data will lead to Friday’s Non-Farm Payrolls, with a lower monthly addition of 195k expected after last month’s 253k.