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Market Update

U.S. credit default swaps hit highs as Tax Day passes

April 24, 2023


Tax collections could cause Janet Yellen to give a sooner-than-expected X-date, causing volatility in the T-bill market. China's GDP comes in higher than expected and European inflation remains high.

The debt ceiling

In January, the U.S. hit the $31.4 trillion debt limit allowed by Congress. Since then, the Treasury has been taking “extraordinary measures” to meet its obligations and buy Congress time to pass a bill to raise the debt ceiling. The debt ceiling has become harder to ignore as tax season has come into full swing. So far, reports have the tax collections for April coming in lower than expected with the Treasury’s general account closing out last Tuesday at $252.55 billion. Janet Yellen is expected to give an updated X-date in the coming days of mid-June, potentially decreasing the amount of time Congress has and increasing the chance of the U.S. defaulting on its debt. Even though the chance of default is still small, U.S. credit default swaps have hit their highest point in over a decade. The price of 3-month and 6-month Treasury bills have also steadily declined over the last few weeks over fear that the bill’s maturity date will line up with the X-date. Conversely, prices for 1-month bills have risen dramatically as investors take shelter from volatility in the shorter-term bill. In the FOMC minutes released earlier this month, they mentioned that the added volatility in the Treasury market is contributing to wider spreads for corporations when borrowing.

As markets continue speculating over where the Fed funds rate will be by yearend, the last two weeks have included a steady increase in jobless claims and a 1% decrease in retail sales in March. As of Friday morning, a 25 basis-point hike is projected for May’s meeting, and after the stress the banking system has seen so far this year, most find it unlikely we will see an additional hike.

China and European inflation

On Tuesday, China revealed that its GDP grew 4.5% year-over-year and beat expectations by 0.5%. Janet Yellen commented on the increasing tension between the U.S. and China in her speech on Thursday, labeling the relationship as essential and promoting healthy competition.

In Europe, reports point to inflation being much stickier than in the U.S. The E.U. released March’s CPI data showing that year-over-year inflation fell to 6.9% from 8.5%. This move was largely driven by a fall in energy prices and led markets to believe a 25-50 basis-point hike is expected in May.

U.K. inflation is now reported to be the highest in Western Europe after coming in at 10.1% year-over-year for March. The U.K. has struggled to tame inflation due to its dependence on natural gas, which has driven increases in the pricing of core goods.

(Related insight: Learn more about the current FX landscape at the upcoming webinar, “Managing and Communicating FX Noise in Your Financial Statements," on April 25.)

Source: U.K. Energy in Brief 2022

The week ahead

Next week, keep an eye out for a consumer confidence report; little change is expected with the forecasted value at 104.2, the same as last month. A month-over-month Core PCE Price Index report for March will also be released with an expected increase of 0.3%. Also, on Thursday, the BEA will release its advance estimate of Q1 GDP, forecasted to be 2.0%.

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