Trends we’re tracking: Hermit consumers, the Treasury, and oil
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The hermit consumer
Although GDP and employment figures across the developed world have rebounded since the pandemic, consumer habits have not yet recovered. Consumer spending on services had been increasing in the years leading up to the pandemic, but since then, consumers are now turning their spending toward goods. Some estimates have stated that consumers are spending around $600 billion less on services than predicted. That money is now being spent on home goods, in particular. Home Depot’s revenue is up about 15% since 2019. Several reasons for the change in behavior include fear of infection, changing work patterns, and changing values as people want to stay in more.1
Surging U.S. government debt amid higher rates
The sharp increase in long-term interest rates this year coupled with rising debt issuance and continued deficit spending has brought the mountain of U.S. government debt, currently over $33.5 trillion, under greater focus. Putting the size of debt in context, it would be equal to roughly $100K per U.S. citizen. Before COVID-19, total U.S. debt was $23.2 trillion at the end of 2019, and was under $20 trillion as recently as 2016. High debt levels drew less scrutiny in a lower rate environment, but the combination of higher debt and higher rates is proving more challenging.2
With higher rates, the cost of servicing the government’s growing debt pile has surged. In the 2023 fiscal year, ending September 30, the U.S. government spent $659 billion paying the interest on its debt, equal to roughly $2K per U.S. citizen. This is up from $476 billion in 2022 and $352 billion in 2021, highlighting the steep increase. Interest payments now make up one of the largest federal expenditures. Economists estimate interest payments will swell to over $1 trillion annually in coming years, totaling over $10 trillion in interest payments by 2033.3 With Congress and the White House debating additional foreign aid including military funding for Ukraine, support for Israel and Tawain, and U.S. border security projects, the debt level and interest service cost has received renewed interest. This calls into question whether U.S. debt may finally be reaching a level that is unsustainable given the current spending path and higher rate environment.
Treasury upstages the Fed
On November 1st, the Federal Reserve Open Market Committee (FOMC) held its policy rate constant in a range of 5.25-5.50%. However, unlike most Fed announcements, which are exactingly scrutinized by market participants, this one was overshadowed by an even more anticipated announcement from the Treasury Department. In its quarterly refunding announcement, the Treasury acceded to market participants by emphasizing short-dated issuance in the fourth quarter of this year, when it expects to sell $776 billion in debt, its highest figure ever for the fourth quarter, but down from the $1 trillion it sold in Q3. Having raised long-dated issuance less than expected, many investors hope the Treasury’s move will relieve upward pressure on Treasury note and bond yields.4
Middle east conflict, megadeals, and the Energy sector
The ongoing war in the Middle East has grabbed the attention of global energy markets. However, a repeat of the 1970s-type oil shock is unlikely as OPEC’s oil market share has fallen significantly. Moreover, the U.S. has emerged as the largest producer of oil with ample spare capacity. While these changes help prevent major shocks, markets will be wary of any significant escalation that might disrupt the traffic of oil through the Strait of Hormuz. This narrow strait between Oman and Iran transports a fifth of the world’s total oil consumption daily.5,6,7,8
The energy sector also saw two megadeals announced days after the eruption of conflict in the Middle East. On October 11th, Exxon Mobil announced a $60 billion merger with Pioneer Natural Resources, and on October 23rd, Chevron announced its decision to acquire Hess Corporation in a $53 billion all-stock deal. Exxon’s deal enhances its capabilities in the Permian basin and Chevron’s deal is focused on Guyana and the Bakken Shale. These megadeals exemplify the effort of oil majors to expand closer to home and away from regional conflict zones.9,10
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