Macro Economy Weekly | Bitmidas
2023–11–29
U.S. debt is under great pressure and may prompt interest rate cuts
U.S. companies and U.S. government debt are facing varying degrees of pressure, causing concerns in the financial market. A significant tightening of financial conditions could trigger conditions for interest rate cuts…
Important Data of the Week
The number of initial jobless claims in the United States in the week to November 18 was 20.9, lower than the expected 22.6 and the lowest since the week of October 14. The number of people filing for unemployment benefits in the United States fell for the first time in two months.
The U.S. durable goods orders recorded -5.4% in October, the lowest since April 2020. According to the data, commercial aircraft bookings dropped, demand for business equipment weakened, indicating that factory production will have difficulty gaining momentum, and there was a rapid cooling after the cumulative burst of economic activity.
On November 22, the Atlanta Fed’s GDPNow model projected U.S. real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2023 at 2.1%, up from 2.0% on November 17.
The market is worried about the debt crisis of US companies, and the amount of US corporate bonds in maturity in 2024 is smaller than that in 2023. Statistics based on issuance show that 2025–2026 will be a peak, with greater debt pressure and risk. The amounts of U.S. corporate bonds outstanding matures from 2024 to 2026 are 8,811, 11,273, and 1,313.7 billion US dollars respectively.
In fiscal year 2023, the U.S. federal government received US$4.4 trillion in revenue and spent US$6.1 trillion, with a deficit of nearly US$1.7 trillion, an increase of 23% from $1.38 trillion in the previous fiscal year.
As of November 17, the U.S. federal government debt exceeded US$33.7 trillion, equivalent to 131% of the US GDP in 2022. In fiscal year 2023, net interest expenses accounted for more than 10% of annual fiscal expenses.
The balance of overnight reverse repo has fallen from a peak of more than 2.5 trillion U.S. dollars to about 1 trillion U.S. dollars. If this scale drops further in the future, it may trigger market concerns about liquidity.
The labor market is flexible and the expected probability of interest rate hike has been reduced to a certain extent. The probability of an interest rate cut in March 2024 has dropped to less than 30%. The more reliable time point for an interest rate cut is still around May 2024.
Expectations for interest rate changes have shifted significantly to dovish, with more rate cuts expected in 2024 and nearly 100 basis points of rate cuts already priced in for next year.
Federal Reserve Balance Sheet
Federal Reserve officials stated that the Federal Reserve’s balance sheet will not end soon and will continue to reduce its balance sheet. Its size has been reduced to US$7,814,991.64 ($M). (The data has not been updated yet)
Recession Indicators — — U.S. Debt Inversion
The pressure for bond issuance increased, the stock of reverse repos shrank, U.S. bond yields ended their decline, and the 10-year bond rebounded to 4.4724%, 2/10-debt inversion spread expansion to 48.25bp.
Market Performance
Interest rate cuts are expected ahead of schedule, with a mild rate cut of 100bp expected in 2024. Support for the US dollar has weakened and pressure has increased. The US dollar index is weak and continues to drop to the 103 area. 102–100 is the dividing line for the US dollar index.
Interest rate cuts are expected ahead of schedule, and the weakening of the US dollar is bullish for gold. Gold has exceeded the US$2,000 and is running positive.
Expectations of rate cuts have increased, and the pressure on U.S. corporate debt in 2024 is actually not so big. The S&P 500 has entered a strong consolidation after a V-shaped rebound from the key support of 4100.
The $3.82~$3.86 area is the key resistance this month. BTC has reached this area again. The resistance in this area has loosened. The closer it is to the end of the month, the easier it will be to make a breakthrough. If the breakthrough is effective, it will be easy to enter $40k~$46k.
Summary
The market has recently become increasingly concerned about the increase in U.S. corporate bonds and U.S. government debt, in fear of a black swan in 2024.
Data shows that the amount of U.S. corporate bonds matured in 2024 is smaller than that in 2023, and the debt repayment pressure is relatively low. However, due to the current sharp increase in U.S. corporate bond yields, if interest rates do not fall, corporate refinancing pressure will be high in the future. This will have a great impact on the economy and involve more risks in 2025–2026.
The U.S. government’s debt of $33.7 trillion and the current high interest rate environment will make the U.S. fiscal situation even tighter in 2024. According to the current issuance plan of the U.S. Treasury Department, the net issuance volume of interest-paying bonds in the next two quarters is approximately US$700 billion, and the baseline issuance size for the full year is approximately US$140 million, which is higher than that of approximately US$100 million in 2023.
Once the excessive supply of med-to-long-term bonds puts upward pressure on long-term bond interest rates, the US Treasury Department may increase the issuance of short-term bonds, which will absorb market liquidity. This means that the size of overnight reverse repo may further shrink. To a certain extent, this means that the possibility of the Federal Reserve cutting interest rates increases. The rate of moderate interest rate cuts in 2024 will be as high as 100bp.
Overall, there are certain risks for U.S. debt in 2024, but the probability of a black swan is low; economic slowdown, debt pressure, liquidity pressure, and continued cooling of inflation are likely to trigger an early mild interest rate cut next year.
Completion of this report: 2023–1125–09:20 (UTC+8)
Follow us on Twitter https://twitter.com/BitMidas, and get daily Bitcoin analysis to aid your trading strategy.
