Dear valued client,
President Biden and Republican leadership reached a deal to raise the U.S. debt ceiling and prevent a default. Markets responded in kind this week with a 3% gain.
Why was this a significant development?
We can think of the financial system as an agreement whereby people promise to pay for or do things in the future, i.e., taking on a mortgage or buying stocks. However, the system can’t just rely on trust; if you want to borrow money, you have to provide collateral that’s stable, liquid, and whose value is easy to determine. On a global scale, that collateral is often U.S. Treasury bills. The problem is that if the value of all this collateral suddenly shifts, we can expect some significant wobbles, if not an outright collapse of the entire structure (JENGA!). Luckily, the U.S. dollar has been stabilized for the foreseeable future with the deal struck this week.
On a broader perspective, a summation of U.S. economic conditions was published this week by the Federal Reserve. The report detailed signs of cooling in recent weeks as hiring and inflation eased slightly (though many more jobs were added in May than expected). However, the slowing pace may not be enough to keep interest rates stable for an extended period of time. The growing census is that rates will remain unchanged in the upcoming June meeting, but will likely rise again in July.
From our side of the border, Canada’s 2023 Q1 GDP report came in this week indicating economic growth of 3.1%. It is encouraging as this growth comes on the heels of a stalling GDP in the last quarter of 2022 and in the midst of tighter monetary policy. The Bank of Canada is set to meet next week to make an interest-rate decision.
In geopolitical news, drones struck apartment buildings in Moscow this week in the first attack on residential neighborhoods in Russia’s capital since the war began. Putin claimed Ukraine sent the drones, and threatened to retaliate with “tit-for-tat” measures. The attack on Moscow came days after Russian bombardment of Ukraine’s capital, Kyiv. Putin should acquaint himself with Newton’s third law of motion if he’s genuinely wondering what’s going on.
“Our life is just a game of Jenga, where you place pieces of love, trust, and friendship carefully. Only to realize, that no matter how high you build it, one mistake is what it takes for you to start all over again.” – Sushmitha Duvvi
Have a terrific weekend,
PW
