📑 Research Notes for 2023-05-08
This week, we look at a potential default of the U.S. from the debt limit constraints, a hawkish pause by the Fed, insolvent U.S. banks, and the new U.S. Treasury buyback program.
We conduct extensive investment research and share the most interesting content that we come across every week. Here is a curated list of this week’s top observations.
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Last Week’s Market Performance Heatmap
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US Treasury Secretary Janet Yellen Warns of Potential Default by June 1.
US Treasury Secretary Janet Yellen has warned that the Treasury's debt limit measures may be exhausted by June 1, potentially leading to a default on some of its obligations. Yellen has called on Congress to raise the debt limit, but negotiations between Republicans and Democrats have been difficult. The market had previously expected the X date to be in July or August, but Yellen's letter suggests it could be as early as June 1. A new round of tax payments comes into the Treasury on June 15, which could restore some of the coffers.
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Federal Reserve Suggests End to Tightening Cycle with 25 Basis Point Rate Hike.
The Federal Reserve has raised its target rate by 25 basis points to 5.25%, but also suggested that the longest and steepest tightening cycle since the 1980s may be coming to an end. The statement dropped wording anticipating additional policy firming and instead said the committee will closely monitor incoming information to determine the extent to which additional policy firming may be appropriate. The economic summary notes a modest pace of growth in the first quarter, robust job gains, and still elevated inflation. The committee remains highly attentive to inflation risks and there is no change in the pace of QT, which is still capped at $95 billion a month. The statement suggests a possible pause in the tightening cycle.
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Half of America's Banks Potentially Insolvent.
Almost half of America’s 4,800 banks are already burning through their capital buffers. They may not have to mark all losses to market under US accounting rules but that does not make them solvent. A Hoover Institution report by Prof Seru and a group of banking experts calculates that more than 2,315 US banks are currently sitting on assets worth less than their liabilities. Somebody will have to take those losses.
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US Treasury Launches First Buyback Program Since 2000.
The US Treasury Department has announced its first buyback program since 2000, which will involve purchasing up to $7 billion in outstanding debt. The move is aimed at reducing the amount of outstanding debt and is seen as a signal that the government is taking steps to address concerns about rising inflation and interest rates. The buyback program is expected to begin on August 17 and run through September 14.
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Curated by Joseph Lu, CFA®
Joseph is the founder and managing director of Conscious Capital Advisors, and a CFA® Charterholder.
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