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U.S. DEBT CEILING The U.S. debt ceiling is back in play at the level of debt on March 1, 2019, or something north of $22 trillion. Given the various ways the U.S. Treasury Department can move money around, the debt ceiling is unlikely to bite until August or September. End-September is also when the U.S. government again runs out of authorized spending. The federal budget submitted to the U.S. Congress by the President seems especially  in Medicare and reductions in Social Security disability payments – two issues guaranteed to provoke Congressional gridlock. So, a government shutdown and a technical debt default will be on the table in September 


The twin scenarios of a shutdown and technical default are low probability outcomes, yet they would typically hit equities hard. Treasuries might  dollar might also be weak, as the U.S. brand in global markets would be diminished and U.S. risks would be rising. Finally, any new government shutdown is likely to be much more damaging to the economy than previous ones, as more economic players are now keenly aware of the costs of a shutdown and will move to anticipate the problems sooner than before.


Chart 2: US Real GDP Growth appears to be decelerating into 2019 and 2020. The long-term trend is mostly about demographic  short-run deceleration.


9% 6%


BOTTOM LINE FOR MARKETS  ceiling crisis are looming over economic growth and equity markets. While equity markets appear to have discounted a substantial slowdown in earnings growth from 2018, when the corporate tax cut enlarged  have fully gauged the extent of the economic slowdown. After all, the economic data during 2018 was quite good, especially regarding job creation and the unemployment rate. Nevertheless, one should not drive a car looking only in the rearview mirror, and the signs for 2019 suggest a serious deceleration of economic growth, if not a recession (see Chart 2).


Our bottom line is as follows:


• Earnings deceleration may be worse than currently realized.


•  Fed abandons its focus on robust labor markets 


• Depending on the extent of the economic deceleration, the Fed’s next move may be to cut rates.


•  


3%


• Political brinkmanship will play a very large role whether the U.S. federal government shuts down again in October and whether a debt ceiling crisis triggers a technical default, disrupting repayments of principal on Treasury securities maturing during the crisis period.


0% -3%


Chart Created by CME Group Economics Team. Data Source: St. Louis Federal Reserve Bnk FRED Database (GDPC1) through 2018, CME Economics estimates for 2019-2020.


Blu Putnam E: bluford.putnam@cmegroup.com


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The   This report and the information herein should not be considered investment advice or the results of actual market experience.


28 | ADMISI - The Ghost In The Machine | March/April 2019


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