3 Things You Need to Know This Week | Debt Ceiling, Monetary Policy, Eurozone Update (May 5, 2025)

Transcript

Stephanie Kuehne:

Hello, and welcome to 3 Things You Need to Know This Week. A regular series designed to help you sift through the noise across financial media and understand what really matters for markets. And now, here are three things you need to know this week.

First up, a US debt ceiling update.

The US Treasury is expected to give an update on how much longer the government can avoid hitting its debt limit. Current estimates suggest extraordinary measures will run out sometime this summer or early fall. Now, people may worry that this means the government could default on its debt obligations or at least come dangerously close to it. But we believe the probability of that is very low. And here's why. Defaulting means making principal and interest payments on outstanding debt. So, the question becomes can the Treasury keep up with its debt servicing obligations? Federal tax revenues fluctuate month to month, but they're much higher than monthly interest payments. Plus, the Treasury can prioritize interest payments over other federal expenditures. Then to, recall that even if the US hits the debt ceiling, the Treasury can still issue new debt to refinance maturing bonds. And that's why we believe a US debt default is unlikely.

Next, monetary policy decisions.

This week we'll get several central bank monetary policy announcements. This includes the US Federal Reserve on Wednesday and the Bank of England on Thursday. The Fed is expected to leave rates where they are, while the Bank of England is expected to cut rates again after a 25-basis point cut in March. Recent market volatility has made many investors uneasy, with some calling for central banks to use rate cuts to support the economy. We think that this overstates the impact central banks have on the economy. Policy rate changes don't guarantee a particular economic outcome. Take the last few years, for example, when the fed and other central banks aggressively raised rates in 2022 and 2023, many feared a big recession. But that didn't happen. So why would holding rates steady today or cutting more slowly suddenly weaken the economy? To us, the last few years demonstrate that central bank rate cuts aren't critical for markets or the economy to continue to grow.

Finally, an update on the eurozone.

Although the eurozone has beaten GDP growth expectations each of the last four quarters, tariff fears have weighed on sentiment in recent months. Further structural challenges in France and Germany have caused some to worry a financial crisis is inevitable and would doom the eurozone to economic stagnation. But not everything is as bleak as it seems. Some of the countries hit hardest by the eurozone's 2010 crisis Spain, Italy, Ireland, Portugal and Greece have actually been driving much of the eurozone's recent economic growth. Plus, European households are in better financial shape than many realize. Household cash levels are high. Net debt to equity is at some of the lowest levels in decades, and disposable incomes continue to grow. All in all, we see this as evidence there remains a decent gap between sentiment and reality in Europe.

And that's it for this episode of 3 Things You Need to Know this Week. For more of our thoughts on markets, check out This Week in Review, released every Friday. You can also visit FisherInvestments.com. Thanks for tuning in and don't forget to subscribe!