Equity markets are sanguine about a potential default, believing an eleventh-hour compromise will be made after both sides of the political aisle have attempted to appease their party’s bases.
The ideologues must be convinced “their side” have both fought hard enough for their causes with only the most zealot ideologue holding out. It is widely accepted defaulting is only marginally worse than out of control and unsustainable spending, especially in a rising rate environment.
The credit default swaps market is, however, suggesting a different outcome. Short dated US Treasury Credit Default Swaps (CDS) are more expensive than countries who have defaulted including Russia, Greece and Brazil.
According to Bloomberg, executives from the nation’s three largest banks—JP Morgan, Citi and Bank America, are both privately and publicly are sending a cohesive message to the Biden Administration and Congress of “Get it Done now.” The Banks are collectively warning about the damage that might occur if the country defaults or does not reign in its spending.
Changing topics, Bloomberg writes 2Q23 earnings estimates have declined again. Profits are now expected to fall by 7.8% versus 7.2% the week before and 6.5% about a month ago. Third quarter results are also expected to be negative by 0.7% before a rebound in the fourth quarter.
The S & P 500 is on track for four straight quarters of EPS decline, the longest stretch in “many years.”
Bloomberg further writes the earnings drop may not be as deep as the pandemic but is “considerably longer.” A profit decline of three quarters last occurred in 2015-2016 when the Fed started their last inters rate hiking cycle.
If the debt ceiling debate is not resolved or a default occurs, Bloomberg writes the profit decline could be one of historical proportions.
Commenting on yesterday’s markets, the Dow fell about 1% on debt ceiling fears. The NASDAQ off about 0.2%. Treasuries increased in yields across the spectrum.
Late yesterday afternoon, Speaker McCarthy stated a compromise to raise the debt ceiling is possible “within days” but acknowledged both sides are still far apart.
Last night the foreign markets were down. London was down 0.08%, Paris down 0.16% and Frankfurt up 0.28%. China was down 0.21%, Japan up 0.84% and Hang Seng down 2.09%.
Futures are nominally higher on hopes of debt ceiling breakthrough. The 10-year is up 2/32 to yield 3.53%.