Six to eight months ago, the common narrative for economic forecasts was that a recession was to start in early to mid 2023, aka now. True to form, this month's economic data paints a very different picture, one at least for the moment, is absent of a recession. The latest unemployment figures showed an increase of 250,000 jobs, when estimates were expecting 180,000. This takes our unemployment down to 3.4%, a level not seen since 1969. Furthermore, Personal Income, Retail Sales, Personal Consumption, Personal Savings, and Pending Home Sales have all been positive for the last three months. We are clearly not in a recession, however historically reliable leading indicators imply a recession is likely by year end.
This month's bank collapse belongs to First Republic Bank, which was quickly purchased by JP Morgan Chase. This bank had their name thrown around when Silicon Valley Bank was having issues in March. During that time, they had a cash infusion by a few of the larger banks, which ultimately proved to be little too late. The good news is that no depositors lost any money, and has not caused any additional panic.
Shortly after First Republic Bank went under, the Federal Reserve raised interest rates by .25%, and due to the language used in the press conference, it is widely expected that this would be their last rate hike. This outcome was reinforced by the latest CPI (Consumer Price Index) reading coming out at 4.9%, lower than the 5.1% the market was expecting. Furthermore, the bond market is actually forecasting the Fed will cut rates before the end of the year. Pausing this rate hike cycle is widely considered to be good news for the stock market, however inflation could persist, which hurts the economy long term.
As noted in previous emails, the debt ceiling is a self-imposed limit on the amount our government can borrow. The US Treasury stated that they will effectively run out of funds to pay current bills starting on or around June 1st. This has triggered the expected blame game in Washington DC, with negotiations ongoing to get the issue resolved. To be clear, we do not expect, nor does anyone really expect the US to default on our debt. Doing so would arguably be the biggest self-inflicted wound in our country's history.
Normally, congress will come together to raise the debt ceiling, letting the party go on. Due to the immediate deadline in less than a month, many proposals have been floating around, from minting a 1 trillion dollar coin, to revaluing the US Government owned gold (currently valued at $42/ounce). As has happened many times in the past, at the last minute our government will reach a compromise and raise the debt limit.
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