- Debt ceiling talks inch forward in the US but slow progress causes nervousness
- Brent crude dips back below $76 amid caution about global economic health
- UK public sector debt rises in April, above expectations as interest payments prove painful
- Moody’s warns that the government will find it hard to reduce debt due to sicker and ageing population
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’Debt ceiling talks are inching forward, but it’s slow progress, and with uncertainty hanging in the air, gains on equity markets are being held back. The FTSE 100 has opened lower, following on from a weaker session in Asia and lackluster trading on Wall Street.
If no agreement is reached, the US could default on interest it owes on its debts, sending borrowing costs soaring and sending shockwaves through the global economy. The forecast incoming mild recession would turn into a storm and the US financial credibility would be badly shaken. That’s why President Biden and Kevin McCarthy, the Republican House Speaker, are saying they are confident there will be no default, but it’s clear Republicans want to squeeze every drop of commitment to curtail spending out of the administration. (extra gap) With talks going to the wire, caution is set to stay front and centre on financial markets. Interest demanded on US government debt has risen to the highest level since March, with the yield on the US 10-year Treasury note hitting 3.72%, amid the budget uncertainty and expectations that US interest rates will linger for longer to keep inflation in check.
Brent Crude has dipped back below $76 a barrel, as investors assess the slow progress in talks, but further falls are being held back by an International Energy Agency report forecasting an upswing in demand in the second half of this year.
Ballooning budgets and busted forecasts appear to be all the rage. Public sector net borrowing in the United Kingdom surged to the second highest level in April since records began thirty years ago, rising to £25.6 billion from £13.7 billion last year. This is much higher than forecast and comes despite the economy showing signs of avoiding recession. The money flowed less quickly into government coffers than expected, with receipts coming in below forecasts from the Office for Budget Responsibility, even though more taxpayers have been sucked into higher bands. It’s not just the cost of the energy support scheme and rise in benefit payments causing the government a headache, but the high cost of debt interest it has had to pay is smarting. The rapid ratcheting up of interest rates has caught the government off guard, and with another hike expected, the pain is set to be prolonged. Moody’s has warned that social and economic conditions prevalent in the UK will mean the UK’s debt share will keep marching upwards due to aging and sicker populations. It means the government’s wriggle room to offer extra spending is reducing fast, with the prospect of fewer sweeteners being dangled before the next election.’’
