US debt passes $34 trillion

The total US debt surpassed $34 trillion, just months after passing $33 trillion. The debt has increased by $12 trillion in the last five years, representing a growth of more than 55%. The estimated debt service (interest that needs to be paid) in 2024 is $685 billion, which would be the second largest expense after the $800bn defense budget. The CBO estimates debt service to hit $1 trillion in 2025, at which point it will surpass the defense budget.

• The level of debt is less important than the percentage of GDP
• The problem is that debt to GDP now stands at 123%
• This figure was 87% in 2010 and 58% in 2000
• The concern is foreign governments begin to question the credit of the United States and drive up the rate of interest they demand
• This was part of the narrative that drove the long end of the bond market higher for some of 2023
• While this is concerning, Japan reached a debt-to-GDP ratio of 100% in the 1990s and it currently stands at 263%
• In Japan, the central bank keeps a cap on interest rates for their debt, which has come at the expense of their currency
• This is something to keep in mind as we move forward
• A weaker US dollar would be positive for dollar-denominated assets (stocks, commodities, etc)

Geopolitical risks rise

There was a significant increase in geopolitical activity this week with continued attacks by Houthi rebels in the Red Sea, North Korea launching missiles toward South Korea, and the largest suicide attack in Iran in the last decade. This is in addition to the continued wars in Ukraine and Israel.

• While there are always geopolitical risks, the cadence of events seems to have increased
• Even without escalating to additional wars, these events have an inflationary effect
• As an example, as ships have to re-route, it takes capacity out of those routes and increases shipping rates
• It can also drive up the price of oil, which has been under pressure until very recently
• If these events create a tailwind for inflation, it will complicate the Fed’s current plan of cutting interest rates this year

Labor market remains tight

The most recent jobs report showed the job market continued to be resilient. The US economy added 216,000 jobs, and the unemployment rate came in at 3.7%. Both were better than expected. Wage inflation remained elevated at 0.4% month over month and 4.1% year over year. That said, the prior several months were revised lower, which has been a pattern for a while.

• The labor market appears to be surprisingly resilient in the higher rate regime
• There are reasons to be cautious, however, including consistent negative revisions
• A decent chunk of the hiring has been in the government sector
• We still think wage inflation is an important statistic to be focused on in the near term