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U.S. Debt Ceiling Returns: Renewed Fears of Shutdown and Liquidity?

With the U.S. Debt Ceiling Reinstated on January 2, 2025, Market Concerns Over Raising or Suspending the Debt Ceiling to Avoid Default Have Intensified. On December 27, Treasury Secretary Janet Yellen sent a letter to Congress warning that the debt ceiling could be reached between January 14 and January 23. If this happens, the Treasury may need to implement “extraordinary measures” and utilize the Treasury General Account (TGA) cash balance to prevent a technical default and another government shutdown. Notably, the Federal Reserve highlighted in its meeting minutes that the reinstatement of the debt ceiling would complicate the assessment of market liquidity and the impact of quantitative tightening (QT) due to the dynamic interaction between TGA balances, overnight reverse repurchase agreements (ON RRP), and bank reserves. In the short term, the U.S. Treasury is expected to mitigate default risks using the TGA account, temporarily alleviating market liquidity pressures. However, once the X-date is reached and large-scale debt issuance resumes, market liquidity will inevitably tighten. If the Federal Reserve has not concluded QT by the X-date, significant liquidity risks may arise. What is U.S. Debt Ceiling? The U.S. debt ceiling, determined by Congress, sets a statutory limit on the federal government’s borrowing to control debt growth. Established in 1917 to manage wartime fiscal spending, it has since been adjusted or suspended whenever the government needs additional borrowing capacity. However, prolonged legislative procedures often delay debt ceiling adjustments, risking a default and government shutdown. To avert this, the Treasury typically employs “extraordinary measures,” using TGA balances to cover government expenditures. Once these funds are exhausted, the government reaches the “X-date,” facing a technical default and a potential shutdown, causing broader market disruptions. Historically, the likelihood of a U.S. technical default has been low. The debt ceiling often serves more as a political bargaining tool between parties than an actual fiscal constraint. For instance, in January 2023, when the debt ceiling was reached, the Treasury deployed extraordinary measures until June, when Congress passed the “Fiscal Responsibility Act” to suspend the borrowing limit. This scenario mirrored the 2017 debt ceiling episode when the Republican-controlled Congress faced a similar situation. Interaction Between the Debt Ceiling, the Federal Reserve’s Liabilities, and QT The debt ceiling’s reinstatement directly impacts the Federal Reserve’s balance sheet, a focal point for investors and policymakers given the Fed’s dual role as a major holder of U.S. Treasuries and executor of monetary policy. The Fed’s balance sheet liabilities can be broadly categorized into three components: Bank Reserves: Funds held by financial institutions in their Fed accounts. Treasury General Account (TGA): The primary account for U.S. government transactions held at the Fed. Overnight Reverse Repurchase Agreements (ON RRP): A monetary policy tool allowing the Fed to sell securities to counterparties and repurchase them later at a higher price. Read more at Datatrack When the debt ceiling is reinstated and remains unchanged, Treasury issuance is constrained. Consequently, excess government spending must be covered through the TGA account, injecting liquidity into the private and banking sectors. This increases bank reserves and could drive funds into ON RRP as investors seek alternatives amid reduced Treasury issuance. Simultaneously, the Fed’s QT program—allowing bonds to mature without reinvestment—reduces market liquidity as primary dealers, banks, and money market funds absorb new Treasury issuances. This combination of QT and the debt ceiling introduces complex liquidity dynamics: while QT tightens liquidity by withdrawing market funds, TGA spending injects liquidity. These opposing forces obscure the true extent of liquidity tightening, complicating the Fed’s assessment of financial conditions. The Fed’s November meeting minutes emphasized that the debt ceiling’s reinstatement would amplify the challenges of evaluating market liquidity dynamics. Practical Impacts of the Debt Ceiling Reinstatement As of now, the TGA cash balance stands at approximately $652.6 billion. If extraordinary measures are activated in the coming weeks, market consensus suggests the X-date will occur in mid-2025. During the initial phase of extraordinary measures, TGA cash outflows will temporarily ease liquidity constraints, reflected primarily in reduced ON RRP balances as Treasury issuance slows. Bank reserves are expected to remain stable at around $3.2 trillion. After the X-date, the Treasury will need to issue significant amounts of debt to replenish TGA balances, reducing bank reserves and ON RRP balances, thereby tightening overall liquidity. If the Fed has not ended QT by this point, liquidity conditions could worsen, heightening systemic risks and the likelihood of market disruptions. This aligns with December meeting minutes showing market expectations for QT to conclude by Q2 2025. Although the Treasury’s use of extraordinary measures and TGA funds may temporarily alleviate liquidity pressures, the significant debt issuance required after the X-date will inevitably draw funds away from the banking system and money market funds, placing downward pressure on bank reserves and ON RRP balances. If the Fed continues QT during this period, the market will face even greater liquidity risks.

Manufacturing PMI Recap: US, China, EU, Japan & Korea (Latest)

Key manufacturing data from major economies, including the U.S., China, Japan, and the Eurozone, revealed continued divergence in global manufacturing performance in December. While U.S. demand showed signs of recovery with new orders and production returning to expansion, the Eurozone remained mired in contraction due to weak demand and heightened political uncertainty. In Asia, China maintained expansion for the third consecutive month, supported by policy measures, though internal demand stimulation remained limited. Meanwhile, Japan showed optimism for the future despite sustained contraction, and South Korea returned to contraction as both domestic and external demand weakened. United States: Demand Rebounds, but Industry Divergence Persists The U.S. ISM Manufacturing PMI for December rose to 49.3 (prior: 48.4), marking the ninth consecutive month in contraction but also the highest reading in nine months. Sub-indices revealed encouraging trends, with the new orders index climbing to 52.5 (prior: 50.4) and the production index returning to expansion at 50.3 (prior: 46.8). The supplier delivery index also improved to 50.1 (prior: 48.7). Inventory levels rose slightly, with the inventory index at 48.8 (prior: 48.3), while the new orders-to-inventory ratio widened to 5.8 (prior: 1.9), indicating an overall improvement in demand. However, demand conditions varied significantly across industries. While strong demand in computers, electronics, and electrical equipment offset weaknesses in food, transportation equipment, and fabricated metals, the overall recovery momentum remained uneven. Read more at Datatrack Euro Area: Weak Demand and Political Instability Deepen Contraction The Eurozone's December Markit PMI stood at 45.1 (previous 45.2), reflecting further deterioration in new orders and production. The production index posted its largest decline since October 2023, while inventories were depleted at an accelerating pace without signs of replenishment. Employment contraction eased slightly but remained significant, and stagnant input prices led firms to lower output prices further to stay competitive. Germany: The December Markit PMI dropped to 42.5 (prior: 43.0), with political instability and concerns over U.S. tariff policies exacerbating contractions in new orders and production, both hitting their largest declines in 2024. Employment and backlogs also fell amid weakening demand. France: The Markit PMI fell to 41.9 (prior: 43.1), the lowest since May 2020, as political uncertainty following government instability further dampened demand. Companies accelerated inventory reductions, resulting in the steepest decline since 2009, while production and new orders continued to contract. Business confidence remained subdued. Italy: The Markit PMI edged up to 46.2 (prior: 45.5), reflecting weak Eurozone demand alongside high energy costs and intensified competition in the automotive sector. Firms continued to deplete inventories despite modest cost growth, while weak demand pushed output prices lower. Read more at Datatrack   China: Third Consecutive Month of Expansion, but Limited Policy Impact on Domestic Demand China’s Manufacturing PMI for December registered at 50.1 (prior 50.3), maintaining expansion for the third straight month but slightly below market expectations of 50.3. Sub-indices showed continued growth in production (52.1, previous 52.4) and new orders (51.0, previous 50.8), driven by policies promoting consumer goods trade-ins and industrial equipment upgrades. However, employment (48.2, prior 48.1) remained in contraction, and the new orders-to-customer inventory ratio fell to 3.1 (prior 3.4), reflecting limited effectiveness of stimulus measures in boosting internal demand. Increased market competition and overcapacity led to further declines in input prices (48.2, prior 49.8) and output prices (46.7, prior 47.7), sustaining deflationary risks. Read more at Datatrack ▶ Read More China's Manufacturing PMI Expands for the Third Consecutive Month in December Japan: Sixth Consecutive Month of Contraction, but Optimism Persists Japan’s December Manufacturing PMI was 49.6 (prior: 49.0), marking six consecutive months of contraction as new orders and production continued to shrink. Despite this, employment growth reached its highest level since April 2024. However, declining backlogs and ongoing inventory reductions indicated persistent demand weakness. The yen's depreciation further pushed up input costs, prompting firms to pass on higher prices to customers, resulting in the fastest output price growth in five months. Nonetheless, businesses remained optimistic about future production expansion, particularly in the automotive and semiconductor sectors. Read more at Datatrack South Korea: Weak Demand and Record Low Business Confidence South Korea’s December Manufacturing PMI fell to 49.0 (prior: 50.6), reflecting weaker domestic conditions and slowing demand from the U.S. and China. New orders and production declined further, while export orders showed only modest growth. Inflationary pressures intensified, and firms raised output prices at the fastest rate since November 2023. Beyond economic challenges, uncertainty over U.S. tariff policies heightened concerns for South Korea’s manufacturing sector. Business confidence for the next 12 months turned negative for the first time since July 2020. Excluding the COVID-19 period, it was the lowest level recorded since the survey began in 2012. Global manufacturing in December continued to show pronounced divergence. In the U.S., manufacturing remained in contraction for the ninth month, but production and new orders returned to expansion, signaling initial signs of a demand rebound. However, industry-specific disparities highlighted uneven recovery momentum. In contrast, the Eurozone faced deepening contraction driven by weak demand and political uncertainty, with Germany, France, and Italy remaining the hardest-hit regions. Meanwhile, China sustained its expansion for the third month, but internal demand stimulation remained limited. Japan exhibited resilience in business sentiment despite prolonged contraction, while South Korea faced mounting challenges with weakened demand and record-low business confidence.

How Economic Changes Shape Wealth Distribution?

Since the dawn of human civilization, wealth inequality has been a central issue within societal structures. Despite technological advancements and sustained economic growth driving global prosperity, wealth remains concentrated in the hands of a few, creating a vast disparity compared to the resources held by the majority. Underlying this phenomenon, changes in the economic environment play a critical role. Factors such as asset price fluctuations, inflation, and central bank monetary policies significantly influence the distribution of wealth across households. To provide deeper insights into how macroeconomic factors impact wealth distribution, we examine findings from the European Central Bank’s "Distributional Wealth Accounts for euro area households" report, which highlights the critical role of economic conditions in shaping wealth inequality. Wealth Distribution and Composition in the Euro Area The report reveals stark disparities in wealth distribution across the euro area. According to the data, the wealthiest 10% of households own 56% of the region’s net wealth, while households with wealth below the median hold only 5% of the total. (Source: ECB) A closer examination of net wealth composition shows that as wealth increases, the share of deposits and real estate decreases. Instead, the wealthiest households derive a significant portion of their net wealth from business assets (non-financial business assets and unlisted equity) and financial assets (such as stocks, mutual funds, or insurance products). This composition suggests that wealthier households are generally better positioned to take on greater financial risks compared to less affluent households. (Source: ECB) The Role of Asset Price Fluctuations Differences in asset composition mean that price fluctuations significantly influence wealth distribution. The report indicates that households below the median are more sensitive to changes in housing prices. For these households, wealth is predominantly tied to real estate, which is highly sensitive to interest rate movements. Therefore, shifts in the market or changes in monetary policy—whether tightening or easing—directly affect their net wealth. For example, when housing prices increase by 10%, the net wealth of households below the median can rise by over 10%, while the wealthiest 10% see an increase of only around 5%, as real estate constitutes a smaller share of their overall wealth. (Source: ECB) In contrast, stock price fluctuations disproportionately benefit the wealthiest households. With a larger portion of their wealth held in financial assets, these households are better positioned to capitalize on stock market gains. Data shows that a 10% increase in stock prices leads to a 1.5% to 2% increase in the net wealth of the wealthiest households, while households below the median see almost no benefit. (Source: ECB) Inflation and Monetary Policy’s Indirect Effects on Wealth Distribution Beyond asset prices, inflation and monetary policy indirectly influence wealth distribution. During the pandemic in 2021, all household groups experienced a decline in net wealth, though the decline was smallest for households below the median. This period of rising inflation reduced the real value of liabilities for households below the median, with the reduction in liabilities outpacing the decline in real asset values. As a result, these households saw a net increase in wealth. However, as central banks raised policy rates to curb inflation, the subsequent decline in stock and real estate valuations reduced net wealth across all groups. The impact was more pronounced for lower-income households due to declining real estate prices, while the wealthiest households were more affected by falling financial asset values. (Source: ECB) In summary, wealth inequality primarily stems from differences in the composition of assets and liabilities across households. Net wealth fluctuations are often driven by changes in asset prices, particularly benefiting households with more financial assets. Inflation and monetary policy, rather than directly altering wealth distribution, primarily act as intermediaries by influencing asset price movements. Reference Introducing the Distributional Wealth Accounts for euro area households

US Credit Card Debt Delinquency Rate Hits Subprime Crisis Level!

The U.S. credit card debt reached a record high of $1.17 trillion in the third quarter of 2024, with the serious delinquency rate climbing further to 11.1%, according to data from the Federal Reserve Bank of New York. This level significantly surpasses the 9.98% peak witnessed during the pandemic and is approaching the figures recorded during the 2008 subprime mortgage crisis. Does this imply a weakening in U.S. consumer spending momentum or signal that economic deterioration may already be underway? (Source: Federal Reserve Bank of New York, TrendForce) Over the past few years, the post-pandemic reopening released a surge in global demand, which supply chains struggled to accommodate, resulting in soaring prices. The U.S. Consumer Price Index (CPI) experienced a historic peak not seen in over four decades. In response, the Federal Reserve began raising interest rates in March 2022 and initiated quantitative tightening a month and a half later to further restrict liquidity in financial markets and prevent economic overheating. As of today, while inflation growth in the U.S. has almost returned to the Federal Reserve's target range, the average price level remains 20-40% higher than pre-pandemic levels. This has led to worsening financial conditions, diminished consumer confidence, and greater financial strain on many American households in recent years. While credit card debt has reached a record high, it still represents a relatively small portion of total U.S. household debt. According to data from the Federal Reserve Bank of New York, credit card loans account for only 6-9% of total household liabilities, with the largest share coming from mortgage debt, which comprises approximately 68-73%. (Source: Federal Reserve Bank of New York, TrendForce) This implies that a significant economic slowdown or downturn is more likely to occur in scenarios where real estate prices experience a sharp decline or consumers are unable to service their mortgage debt, potentially triggering what is known as a "balance sheet recession." Historical data shows that during the U.S. subprime crisis, the serious delinquency rate for credit card debt rose to 13.7%, roughly two percentage points higher than the current 11.3% level. However, at that time, the bursting of the housing bubble caused widespread mortgage defaults, with the mortgage delinquency rate soaring to 8.9%. Currently, the serious delinquency rate for mortgages remains at a historically low 0.7%. This stability is largely attributable to the fact that nearly 90% of U.S. mortgages are on fixed rates, allowing many homeowners to lock in low rates from the pandemic period, shielding them from the recent rise in interest rates. (Source: Federal Reserve Bank of New York, TrendForce) Moreover, data on the credit scores of mortgage holders indicates that average scores exceed 750, reflecting significantly healthier financial and credit conditions than those observed before the financial crisis. (Source: Federal Reserve Bank of New York, TrendForce) In conclusion, we believe the risk of a broad economic downturn is limited. While credit card delinquency rates have reached historic highs, their impact on overall household debt is relatively minor. Rising credit card delinquencies more likely reflect the difficulties faced by lower-income or lower-credit-score populations in servicing debts amid elevated price levels. The Federal Reserve's recent research also points out that a significant portion of current retail sales growth is driven by higher-income groups. Looking ahead, as the Fed continues to cut rates, credit card interest rates (currently exceeding 20%) and delinquency rates are expected to decline, potentially boosting consumer demand.

Can China's 10 Trillion Yuan Fiscal Policy Revive the Economy?

China has yet to shake off the risk of deflation, according to data released by the National Bureau of Statistics on November 9. China's CPI Status China's Consumer Price Index (CPI) rose by 0.3% year-on-year in October, marking a 0.1 percentage point decline from the previous month. On a month-on-month basis, CPI decreased by 0.3%, reflecting a similar 0.3 percentage point drop. Read more at Datatrack Breaking down the components, food prices—a key driver of CPI growth—slowed to a 2.9% year-on-year increase, representing a 0.4 percentage point deceleration. Non-food prices, however, recorded a deeper year-on-year decline of 0.3%, mainly due to falling international crude oil prices. Service-related prices edged up by 0.2 percentage points to a 0.4% annual growth rate, driven by a temporary boost in travel costs during the National Day holiday, but still registered a 0.4% year-on-year decline. Excluding food and energy, China's core CPI rose by just 0.2%, a modest increase of 0.1 percentage points from the previous period. China's PPI Status On the China's Producer Price Index (PPI) side, China's PPI contracted by 2.9% year-on-year in October, with a marginal decline of 0.1 percentage points from the previous month. The month-on-month figure showed a decline of 0.1%, albeit an improvement of 0.5 percentage points. Read more at Datatrack The breakdown indicates that producer prices for means of production remained down 3.3% year-on-year, though month-on-month growth of 0.1% suggests short-term support from recent stimulus measures targeting construction-related industries. Conversely, prices for consumer goods saw a broader decline, with a year-on-year decrease widening by 0.3 percentage points to 1.6%. Among durable goods, the decline in automobile factory prices expanded to 3.1%, while prices for computers, communications, and electronic products contracted by 2.9%. Overall, the impact of China's September monetary easing policies appears limited, as consumer confidence remains weak and spending sluggish. This continued weakness has forced businesses to further lower prices, compressing margins and sustaining deflationary pressures in the economy. The Chinese Government Passes a 10 Trillion Yuan Fiscal Policy A day before the data release, China’s National People's Congress Standing Committee approved a fiscal package totaling approximately 10 trillion yuan. This package aims to raise the annual ceiling for special local government bonds by 2 trillion yuan over the next three years to replace implicit local government debts. Additionally, 800 billion yuan per year over the next five years will be allocated to addressing these hidden debts through special bond issuance. However, these measures primarily address debts accumulated through Local Government Financing Vehicles (LGFVs), which local governments have used to fund infrastructure projects and meet central GDP growth targets. By not appearing on local government balance sheets, these debts have enabled governments to bypass borrowing limits, leading to a massive buildup of hidden liabilities. LGFV bonds are frequently repackaged by banks as high-yield wealth management products sold to domestic investors. Despite the low or even negligible economic returns of many of these projects, investors continue to participate, believing that the central government will ultimately back these debts. This broad participation, often with disregard for moral hazard, has created a scenario likened to a "Ponzi scheme." The impact is clear, the continued downturn in China’s real estate market is pushing the country toward a balance sheet recession, with private consumption and investment constrained by the burden of significant private sector debt repayment. While the government is aware of these challenges, its approach has primarily involved "rolling over old debt with new debt," stalling any substantial economic recovery and hindering effective capital allocation.