US: Fiscal uncertainty shifts to December – Nomura

Statements by Congressional leaders yesterday indicated that President Trump and Congress have reached a preliminary deal to address the upcoming debt limit and budget deadlines, notes the research team at Nomura.

Key Quotes

“The proposed fiscal solution, which will include a continuing resolution to 15 December and suspend the debt limit to the same date, will be tied to recovery aid for Hurricane Harvey.”

“A preliminary bill to provide roughly $8bn in aid to areas affected by Hurricane Harvey passed the House of Representatives today 419-3 (the three no votes came from Messrs. Amash, Biggs and Massie, all members of the conservative House Freedom Caucus). That bill will now move to the Senate, where amendments regarding the debt limit and continuing resolution will likely be added on. The final bill could pass as soon as this weekend. However, just hours before the endorsement from President Trump, House Speaker Ryan stated his strong disapproval of the three-month extension of the debt limit. Given Speaker Ryan’s somewhat precarious position atop House Republican leadership, he could stand to lose the most from a deal that House Republicans may not support. This introduces a marginal amount of uncertainty for final passage.”

“The timeliness on reaching a deal only two days after the end of the August recess is moderately misleading: the agreement today largely shifts any uncertainty from the end of September to mid-December. We had expected a debt limit suspension beyond the November 2018 Congressional midterm elections, giving Congress time to focus on other matters (including the FY 2018 budget and tax legislation). Keeping the debt limit in play before the midterm elections will add to already-elevated uncertainty around fiscal policy.”

“That said, given that the US Treasury’s extraordinary measures will be replenished, the deal suggests the effective date when the US Treasury will run out of cash should be postponed beyond the end of this year. By contrast, a government shutdown would happen if Congress fails to agree on another stopgap budget by 15 December. This means that it is less likely for Congress to tie a budget talk to debt limit discussions. Once the debt limit is suspended, the extraordinary measures implemented since midMarch 2017 will be refilled. In that regard, December could introduce another period of extraordinary measures if a debt limit agreement is not reached by the deadline.”

“However, as Republicans have previously attempted to limit the Treasury’s extraordinary measures, there is some risk they will seek to prevent their use in December. Moreover, the amount of time that extraordinary measures can be implemented varies somewhat depending on which calendar month the initial implementation starts in. When extraordinary measures were introduced in December 2012, then-Treasury Secretary Geithner noted that they would last approximately two months, much shorter than the nearly seven months seen between March 2017 and today, when the Treasury started tapping extraordinary measures this time. This could mean that, barring a debt limit deal in December, the Treasury could face considerably less flexibility with respect to extraordinary measures, increasing the urgency of raising the debt limit. Given the seasonality of budget receipts and outlays and availability of some extraordinary measures, we expect that the so-called “X-date” (when the US Treasury runs out of cash) would fall somewhere towards the end of Q1 2018.”

“The budget outlook for December remains clouded by the Trump administration’s previous demands for border wall funding in any new spending bill, with Mr. Trump threatening a government shutdown over the matter. Overall, we believe that the risk of a shutdown in December remains modest. President Trump’s decision to rescind the Deferred Action for Childhood Arrivals (DACA) program with a six-month delay may allow Democrats and Republicans to strike a deal in December where components of DACA are codified into law in exchange for additional border security funding (perhaps in lieu of a physical wall). However, with Congress’ penchant for acting last minute, a clearer picture for the debt limit and budget outlook could take weeks to emerge.”