By Philip Marey, Rabobank US strategist
Stock markets rebounded yesterday, as the fear of the Omicron variant subsided somewhat. The S&P500 gained 1.2% and the Euro Stoxx 50 rose by 1.4%. This morning, Asia-Pacific stock markets are mostly up. Meanwhile, the 10 year US treasury yield has rebounded to 1.45% after reaching a trough at 1.33% on Friday.
Meanwhile, we could be only a week from the X-date, the date at which the US federal government may no longer be able to pay its bills. Remember that the debt limit was raised to $28.88 trillion in October, after the Republicans blinked. As we explained in Biden’s Game of Chicken, the Democrats want to share responsibility for raising the debt ceiling with the Republicans. Although the Democrats can still easily raise the debt ceiling through budget reconciliation, they do not want the electoral vulnerability that comes with a unilateral increase in the debt limit. Instead of calling the Democrats’ bluff, Senate Minority Leader McConnell blinked in October and delivered the Republican votes for a temporary increase in the debt ceiling. While he claimed this was a one time deal, the Democrats are still counting on him to blink again. The raise in October has only delayed the X-date. According to the Treasury’s most recent estimate, the extraordinary measures to prevent a default could be exhausted as soon as by December 15.
But first the Democrats are trying to attach the debt limit to the National Defense Authorization Act (NDAA), which sets priorities and policy for the fiscal year, which started on October 1. Without this bill military construction projects will be delayed, at a time when the Chinese are building ports around the world. A House vote on a compromise bill between the leadership in the House and the Senate is expected as early as this week. While Democrats are trying to attach the debt limit to this bill, House Minority Leader McCarthy has said he opposed it.
If we reach the X-date before the debt limit is raised, the federal government will be in default. However, it is very difficult to forecast the X-date, especially in COVID times. The Treasury Department’s most recent estimate is that it could be as soon as 15 December. However, in an earlier letter, Yellen mentioned December 3 as the X-date.
Other organizations put the X-date somewhere between mid-December and mid-February. If McCarthy manages to prevent a raise in the debt ceiling through attachment to the NDAA, the pressure will be on McConnell again. If he does not blink, the Democrats still have the possibility to include it in the reconciliation bill (Build Back Better), which is also on the political agenda this month.
After the Build Back Better bill passed the House of Representatives on November 19, it has moved to the Senate. There, the Democrats cannot afford to lose a single vote. This means that Senators Manchin and Sinema are the power brokers again. A simple majority suffices because the Democrats are using the budget reconciliation procedure to pass the bill. If the Senate amends the House bill, it will be sent back there for reconsideration. Three items at risk are paid leave, SALT (state and local taxes) deductions, and immigrant protection. Manchin thinks paid leave should be removed from the bill. The SALT provisions are also controversial to some centrist Democratic senators. The House bill raises the $10,000 cap on the deduction for state and local taxes to $80,000. However, without an income limit this could lead to tax cuts for high income households. In fact, this item was mentioned by Jared Golden – the only Democrat who voted against the bill in the House – as his main reason to vote against the House bill. He thinks the bill’s SALT provision amounts to “tax giveaways to millionaires.” Finally, the temporary legal protections for illegal immigrants could be rejected by the Senate parliamentarian for inclusion in the reconciliation procedure. In this case, the Democrats would have to remove them from the bill. So there are still several steps to be taken. As the year comes to an end, President Biden has yet to sign his signature bill into law