CEO and founder of Complete Intelligence, Tony Nash, recently appeared as a guest on CNA’s Business Update segment. The focus of the discussion was on the ongoing negotiations regarding the US debt ceiling and its potential impact on the financial markets. President Joe Biden expressed confidence in reaching a deal to avoid a historic default, with negotiations now taking place between Biden and Republican House Speaker Kevin McCarthy. The goal is to secure an agreement before June 1, when the US government could run out of funds.
Nash highlighted that while progress has been made with both sides coming to the table, a deal is not expected to be reached immediately. He noted that the parties involved seem to be leveraging the situation to drive their policy agendas. Nash predicts that an agreement may not be reached until mid or late June, allowing for further negotiations.
In addition to the debt ceiling talks, the banking sector and market volatility were discussed. Regional banks, such as Western Lions, have shown improvement in deposit growth, injecting confidence back into the sector. However, regional bank stocks remain largely depressed. Nash emphasized that the troubled banks were poorly managed and not representative of the entire sector. Well-run regional banks are weathering the volatility and benefiting from borrowing facilities provided by the US Treasury to address liquidity concerns.
Regarding interest rates, Nash acknowledged that some failed banks blamed high rates for their demise. Central bank officials have indicated that rates will remain steady, with the possibility of future hikes. Nash believes that the well-managed regional banks can handle rate hikes, and the US economy, while slowing in Q2 and Q3, is positioned to defy recession expectations.
Overall, Nash expressed cautious optimism, acknowledging the challenges ahead but highlighting positive developments in the negotiations and the resilience of the banking sector. The markets are closely watching for progress in the debt ceiling talks and adjusting to the evolving economic landscape.
CNA: Hello and welcome to the business update. President Joe Biden is confident that a deal on the US debt ceiling can be reached as the government faces the risk of running out of funds. Biden and Republican House Speaker Kevin McCarthy have agreed to negotiate directly to avoid a historic default after a prolonged standoff.
Biden: Let’s be clear, this negotiation is about determining the budget’s outline, not about whether we will pay our debts. All leaders have stated that we will not default.
McCarthy: Leader Schumer and I have finally agreed to negotiate. We have abandoned the insane idea of not raising the debt ceiling.
CNA: A negotiating team of White House officials and House Republican leaders will work on reaching an agreement, even while President Biden is in Japan for the G7 Summit. Their aim is to finalize a deal by Sunday, when Biden returns to Washington. The Treasury has warned that the US could run out of money to pay its bills as early as June 1 if the borrowing limit isn’t raised. Extraordinary measures are already depleting the available funds, with only $87 billion remaining as of May 15, well below the targeted year-end balance of $600 billion. Corporate America is growing concerned, with leaders from top banks like JPMorgan and Citigroup meeting Senate Majority Leader Chuck Schumer to discuss the debt limit. JPMorgan CEO Jamie Dimon believes the bank is prepared for any scenario but anticipates that the US will likely avoid a catastrophic default. In response to these developments, US stocks closed higher overnight, fueled by optimism that the debt ceiling impasse will be resolved and a historic default will be averted. All three major indices ended more than 1% up for the session, providing some relief from the debt crisis.
CNA: Sentiment on the street was also boosted by regional banks. Western Lions saw an increase of over 10% after reporting improved deposit growth. Other regional lenders also experienced gains, including Pet West and Zions Bangkok. Joining us now is Tony Nash, founder and CEO at Complete Intelligence. Tony, while a debt ceiling agreement may not be reached soon, there are positive signs from both sides. Do you expect the markets to continue fluctuating?
Tony: Absolutely. It’s progress that both sides are now at the table, but I don’t foresee a deal happening over the weekend or in the near term. It seems both parties want to create drama to drive their policy issues home to their base. We anticipate an agreement around mid or late June. However, the treasury recently announced that they found additional funds, which will extend the X date further into the coming weeks, allowing more time for negotiations. We’ll likely see a resolution around mid-June.
CNA: In the meantime, the banking crisis is also a concern for the markets. Although Western Lions injected some confidence with reports of deposit growth in Q2, regional bank stocks remain largely depressed. Is it too early to say the troubles are over? Is this something the markets should consider?
Tony: The troubles have subsided in recent weeks due to the US Treasury’s program allowing regional banks to borrow for up to twelve months, ensuring liquidity to support depositors. The market is catching up to this program, seeing that banks are borrowing from this facility and addressing their duration risk. Previously, these banks held bonds with low interest rates that couldn’t meet the demands of depositors seeking higher rates, resulting in a loss of deposits. The borrowing window provides a solution to this problem, and we’re witnessing traction and growing confidence.
CNA: However, leaders of failed banks in a Senate hearing blamed high interest rates for their downfall. Central bank officials have indicated they may maintain or even raise rates. How will this impact the sector?
Tony: The banks that failed had poor risk management, which is evident. They didn’t handle their risks well. On the other hand, many regional banks in states like South Carolina and Texas are managing well. While they experienced some volatility in recent months, there are numerous well-run regional banks that remain stable. Unfortunately, the banks that testified on Capitol Hill were poorly managed, although they happened to be prominent names. They paint a negative picture for well-managed regional banks.
CNA: So it’s safe to say their experience doesn’t represent the entire sector. In that case, can the markets handle further rate hikes? And can the US economy defy expectations of a recession this year?
Tony: Our view is that the US will experience a significant slowdown in Q2 and Q3. We still have an inflation issue, which justifies the possibility of a rate hike at the next meeting unless there are changes in the inflation readings. If the readings change, the Fed may decide to pause. However, if inflation continues as indicated by recent data, they may continue raising rates. With the treasury facility providing backstop support to banks, the strengthening of the dollar, and the rally in equity markets, people are becoming more comfortable with the prospect of higher rates for the next five to six months, followed by a pause and potential cuts in 2024.
CNA: Thank you for joining us this morning, Tony Nash, founder and CEO of Complete Intelligence. Stay tuned for more updates in the next hour. Remember, you can catch our business updates across all CNA platforms, including Asia for TV, Radio CNA 938, and digital CNA Asia Business. Adrian and Steve, back to you. Liz, thank you. Up next on Asia First, an update on the Black Sea grain deal set to expire today.