Negotiations are headed for a late resolution given the narrow Republican House majority, an emboldened Freedom Caucus and a spilt Congress. This could lead to higher market volatility as we near the X-date, but ultimately a resolution remains the most likely outcome.
Debt ceiling negotiations have become increasingly contentious, leading to higher market volatility.
The narrow Republican House majority, an emboldened Freedom Caucus, and split control of Congress mean negotiations are likely going down to the wire.
The economic impact of our base case will depend on the spending concessions made by the Democrats, but we do not see this significantly altering the outlook.
If an agreement can’t be found ahead of the X-date, this would likely lead to US debt downgrades, a large equity market correction and a deeper, more protracted US recession.
A challenge to McCarthy’s speakership, a clear deterioration in the state of the negotiations (including widespread ‘X-date denial’), or an earlier X-date would increase the likelihood of a debt ceiling crisis.
While investors should be cognisant of the possibility for higher volatility as we near the X-date, an eventual resolution should mean the impact on markets is short-lived.