In the political arena, recent hopes for an agreement on the US debt ceiling and the need to secure the US government’s solvency have so far only been backed by lip service from political opponents. However, there seems to be some understanding that a technical default by the US sovereign is in nobody’s best interest.
We believe that the odds for an agreement have improved. Our understanding is that the governing Democrats are ready to accept a deal under the concession that defence and non-defence discretionary spending will be kept unchanged in nominal terms in 2024. The Republican-controlled House of Representatives has already sanctioned a debt ceiling increase provided that social spending is cut back to the 2022 level. Lower public spending in April narrowed the discrepancy, probably making an agreement easier.
We think that an agreement will be celebrated in the usual way, i.e. by pushing the decision to the very last moment. Debt ceiling and other budget resolutions are typically found in the eleventh hour only, which could mean in late July only.
The US Treasury market has entered this stress better prepared than in the past. US Treasury bonds can be traded even after maturity on Fedwire and will be accepted as collateral. The question of how deferred interest payments will be made remains open, but the parties are working on it.
Gold and silver prices hit by debt ceiling hopes
A default by the United States would crush confidence in the US dollar as the world’s reserve currency and bring investors back into the gold market. Fears that this default might happen are reflected in the gold/silver ratio, which has risen again. However, as mentioned, we believe that a last-minute deal on the debt ceiling will be reached – and statements about a vote on the debt ceiling as early as this week have already put some pressure on gold and silver prices.
Our overall view on gold remains unchanged: we believe that the gold market is already pricing in a soft and shallow US recession and a related reversal of monetary policy. We thus reiterate our ‘Cautious’ view and do not see the correction as a buying opportunity. Silver prices have returned to more justified levels, which is reflected in our ‘Neutral’ view.
Potential of obesity drugs not yet realised
In contrast to politics, the breakthrough in obesity treatments has actually happened, and the drugs are now being rolled out to patients. The stocks of the companies involved have seen stellar returns already, and yet the future of this market may still be underestimated.
Currently, only 2% of patients suffering from obesity receive anti-obesity treatment. This suggests a huge potential for companies active in this field, and the related market could reach USD 100 billion by 2030. The use of this class of drug may become much more widespread and chronic than most may think.
Monetary policy shift to strengthen the yen?
Last week, important economic data out of Japan showed surprisingly strong GDP growth in the first quarter of 2023 and high core inflation by Japanese standards. The question remains as to whether this data will have an impact on the Bank of Japan’s (BoJ) decision on when to shift its monetary policy stance.
We believe that, at the margins, the data keeps the possibility for a near-term shift alive. Such a shift would likely suffice to liberate the undervalued yen from its burden of the stark monetary policy divergence vs Western economies.
Fully acknowledging that our bullish USD/JPY three-month forecast of 125 is aggressive in terms of timing, we use it to indicate that a policy shift will strengthen the yen in the environment of elevated volatility. Wage growth data presented on 6 June may be decisive for the BoJ scenario.
Recovery of Greek economy likely to be underpinned by political continuity
New Democracy was the big winner of the first round of the Greek elections. Buoyed by the comfortable lead over the opposition, Prime Minister Mitsotakis indicated that he would not seek to form a coalition with another party but rather go for a second election round. An outright majority would give Mitsotakis four more years in power with a cabinet of his choice.
Greece benefits from stronger growth and lower inflation compared to the rest of the eurozone. In part thanks to the support packages and Recovery Funds it received during the Greek sovereign crisis, its economy is well positioned and less vulnerable to interest rate hikes. GDP, employment and tax revenue are all expected to grow by 2026 and improve the primary surplus of the general government. As such, in the April stability report, the Greek government expects to deliver strong fiscal consolidation.
The continuity in government would allow for further reform implementation and usage of the Recovery Funds, while maintaining the commitment to fiscal consolidation may ultimately allow Greece to regain its investment-grade rating.
Please note that, due to a public holiday, the next edition of the Research Weekly will be published on 7 June 2023.