U.S. Debt Ceiling Issue Has Only “One and a Half” Ways to be Solved

Major U.S. equity indexes are trading mixed in late premarket today following warnings by Treasury Secretary Janet Yellen that failing to reach a deal to lift the debt ceiling could cause a recession in the U.S. and a crisis on a global scale. Investors are also preparing for a second wave of busy earnings reports starting on Tuesday.

The base case scenario with how the Debt Ceiling in the U.S. will go is something like this: There won't be any cooperative negotiation or drafts for until the very last hour or so. Then legislators and Treasury start to get very close, and a default becomes a possibility, some last second agreement will get struck, maybe after a bout of market volatility and furious phone calls from lobbyists. The debt ceiling gets lifted at the last second, just like it did in 2011 and every other time Congress has had to raise it in its history.

But 2023 is no 2011 and here's why. In 2011 the GOP had just won a massive midterm victory, sweeping to dominance of both houses of Congress on a Tea Party wave that made fiscal issues (debt, taxes, etc.) the centerpiece of the campaign. Putting up a fight over spending was what the party was all about. Obama spent months of 2011 negotiating with then House Speaker Boehner, his deputy Eric Cantor, alongside then Senate Majority Leader Mitch McConnell. There was a lot of talk but for months there was basically no progress, except up at the very end. Ultimately, Republicans agreed to raise the debt ceiling in exchange for constraints to spending growth for both defense and discretionary outlays.

Corporatewise, Spotify (SPOT) is reported to be the latest among tech companies laying off staff. The music-streaming giant is planning to cut positions as soon as this week, according to people familiar with the plans, who did not specify the number of jobs set to be eliminated. The move comes after a 66% slide in Spotify shares last year, as investors questioned the company's big push into podcasts. If it pushes through with layoffs, Spotify will join peers Amazon, Meta and Google parent Alphabet in recently cutting jobs.

On Friday, Alphabet-owned Google (GOOG, GOOGL) announced it was cutting 12,000 employees, roughly 6% of the full-time workforce. While employees had been bracing for a potential layoff, they are questioning leadership about the criteria for layoffs which surprised some employees, who woke up to find their access to company properties cut off. Some of the laid-off employees had been long-tenured or recently promoted, raising questions about the criteria used to decide whose jobs were cut.

Ford Motor Company (F) could opt for large-scale layoffs of personnel from the factory in Cologne, Germany, the DPA reported on Monday citing the workers' council. According to the workers' council, if the carmaker goes ahead with its plan, up to 3,200 jobs could be lost. As of the beginning of this year, the Cologne business employs around 14,000 workers.

Major stock indexes in Europe are trading this session in positive territory. The preliminary report on consumer confidence in the euro area was published today, as well as the Deutsche Bundesbank's monthly assessment of economic conditions. The German DAX gained 0.29%, as Siemens (SIE.DE) advanced 1.46%. The British FTSE 100 added 0.14%, with Ocado Group (OCDO.L) leading the gains by 2.49%. The French CAC 40 advanced by 0.29%, as Unibail-Rodamco-Westfield (1BR1.F) climbed 2.37%. The Euro Stoxx 600 is trading just 0.13% higher.

The ECB is starting to stand out as a hawkish outlier in a global move toward a downshift in tightening. Governing Council member Klaas Knot said this weekend that the bank should continue with half-point interest-rate increases at the next two meetings, and the time to slow the pace of hikes is “still far away.” He isn’t alone in his pushback against taking the foot off the gas too quickly. ECB President Christine Lagarde told the World Economic Forum in Davos that policy makers would “stay the course.”