The Cambridge Weekly – 30th May 2023

The Cambridge Weekly – 30th May 2023

Debt ceiling angst or simply lack of good news?

Compared to the previous week, markets did not really get much ‘new’ news to digest, and yet last week brought a renewed bout of equity market volatility. Given bond yields experienced even larger moves (up),  speculation has been blaming the latest market wobble on the unresolved US government debt ceiling negotiations. The deadline after which the US government runs out of money – and technically defaults on its financial obligations – is now likely only 5-10 business days away. Given US government bonds are deemed the bedrock of global financial markets, as the only financial instrument free of default risk, market nervousness ahead of such an impending – and portentous – deadline is wholly understandable.

New EU fiscal rules

Europe’s economy has appeared strangely resilient over the last six months. That may sound surprising, and got a bit of a sobering reality check, given last week’s announcement that Germany – the continent’s largest economy – was officially in recession through the winter. German gross domestic product (GDP) fell 0.3% in the first three months of this year, following a 0.5% decline in the last quarter of 2022, putting it officially in technical recession. But the problems could undoubtedly have been much worse. Given Germany’s (and Europe’s in general) previous dependence on Russian energy, last winter was expected to be incredibly bleak with expectations of widespread production shutdowns. In the end, a combination of milder weather which supported construction spending, the faster establishment of liquified natural gas (LNG) supplies from North America and better-than-expected energy storage meant the eurozone emerged without an overall contraction of growth. At least so far, although the recent German numbers are likely to weigh on revised eurozone growth performance – nevertheless, a decent result all things considered.