US President Joe Biden has released a statement confirming he has reached an agreement with Republican House Speaker Kevin McCarthy to raise the $31.4 trillion (AU$48 trillion) debt ceiling ahead of the 1 June deadline.
The deal, subject to congressional approval, would reportedly suspend the debt limit through to 1 January, 2025 while also capping new spending in the next two budgets, and retaining surplus COVID-19-era funding.
The White House has also reportedly agreed to accelerate approvals for energy projects and tighten food aid eligibility requirements.
“It is an important step forward that reduces spending while protecting critical programs for working people and growing the economy for everyone,” President Biden said.
“…The agreement represents a compromise, which means not everyone gets what they want. That’s the responsibility of governing.
“And, this agreement is good news for the American people, because it prevents what could have been a catastrophic default and would have led to an economic recession, retirement accounts devastated, and millions of jobs lost.”
The White House is preparing legislation before formally proposing the bipartisan deal to Congress for a swift resolution.
“I strongly urge both chambers to pass the agreement right away,” President Biden said.
Treasury Secretary Janet Yellen penned a letter to Congressional leaders last week, warning a failure to resolve the deadlock ahead of the deadline could cause the government to default on its repayment obligations.
“We will make more than US$130 billion (AUD$199 billion) of scheduled payments in the first two days of June, including payments to veterans and Social Security and Medicare recipients,” she noted.
“These payments will leave Treasury with an extremely low level of resources.”
“…I continue to urge Congress to protect the full faith and credit of the United States by acting as soon as possible.”
The United States’ “AAA” Long-Term Foreign-Currency Issuer Default Rating (IDR) was recently placed on “Rating Watch Negative” by Fitch Solutions following a setback in negotiations last week.
The news of an in-principle agreement to lift the US debt ceiling buoyed Australian equities, which took a hit last week after negotiations stalled.
The S&P/ASX 200, the All Ordinaries index and the S&P/ASX Small Ordinaries opened 1 per cent higher on Monday (29 May) after losing 2 per cent last week.
But according to AMP Capital chief economist Shane Oliver, the share market boost will be short lived, given broader market volatility.
“US debt ceiling brinkmanship and its aftermath could continue to create volatility ahead,” he said.
“Banking stress is continuing in fits and starts in the US resulting in additional monetary tightening.
“Leading economic indicators continue to point to a high risk of recession in the US and Australia.”
Mr Oliver also pointed to a weaker-than-expected recovery of the Chinese economy and the possibility of further rate hikes from the world’s central banks.
“We remain of the view that shares will do okay on a 12-month view as central banks ease up as inflation cools but the next few months are likely to be rough,” Mr Oliver added.
But UBS Asset Management said investors may have an opportunity to capitalise on equity market volatility.
“We believe the macroeconomic landscape will become more supportive of risk once this large potential headwind is behind us and believe a deal will be struck by early June,” the asset manager noted.
“Any meaningful pullbacks in the stock market linked to concerns about whether a debt ceiling agreement will be reached or if the US government will not service its debt obligations may be an attractive point to increase equity exposure, in our view.”
A rally would be underpinned by corporate resilience to weakening economic activity.
“Corporations have retained pricing power amid a slowing in economic growth — and nominal activity is still high and has room to decelerate further without triggering recession fears,” UBS added.
“The aggregate amount that US companies exceeded expectations increased for both the top and bottom lines during the most recent reporting period.
“The resilience of nominal activity and margins suggest that downside to earnings is limited outside of recession, which we do not believe is imminent.”