As in 2017, The US Congress approved President Trump’s fiscal packagea central piece of your government plan. It is a remarkable political victory that adds to other very relevant recent successes. None more powerful, by the way, that the disarticulation of the Iranian nuclear program after the bombardment of its critical facilities, and the subsequent cessation of fire in the war between Iran and Israel. The Trump 2.0 experience thus stars in a phoenix resurrection. Wall Street Hilvana Record after record and certifies the improvement. It also rehearses a very relaxed vision on the imbalance of public accounts. Without a recession, the deficit will rise another step, to 7% of GDP. Trump did not change. The markets, yes. His complicity – when they worried before imposing discipline – is another equally shocking turn.
Of the anxiety that caused the day of liberation, on April 2, and the apogee of the tariff war, few traces remain. The stock market was then on the edge of the Bear market. Betting markets allocated 67% probabilities to a recession. And the treasure bonds stopped functioning as a refuge of quality. Sell America through, they endured such a punishment that the White House had to back down. Three months later, on Independence Day, what stands out is peace. In the Middle East and beyond (between Rwanda and the Congo, although not yet in Ukraine). Also in commerce, given the agreements with China (and its proxy, Vietnam) and the hundred arrangements with a 10% tariff that anticipates the secretary of the Treasury, Scott Betssen. They still subtract complicated negotiations (with the European Union, Canada and Japan, by case) and there will be sizzling. But the will is to unify positions and not exacerbate confrontation. The best example is Trump’s decision to raise restrictions on the export of semiconductors to China. Or the trip to Beijing, at the invitation of Xi Jinping, surrounded by a delegation of CEOS. The idea is to do business and not war.
The bag celebrates and the “vigilantes” mutis by the forum
La Paz also in the Capitol, although he has demanded iron hand by the president and his banks of banks. After a demonstration of strong control of the Republican Party -fundamental, since the initiative did not obtain any Democratic vote- the White House ensured the passage of a large reduction of taxes at the same time that promises a pruning of the expense, significantly lower. Estimates of its accumulated effect on the fiscal deficit in the next ten years vary between an increase of 3 or 3.3 billion dollars. The federal debt, which already adds 36.8 billion dollars, will continue thus in a rapid ascent.
If in April it caused vertigo – and Moody’s’s decision to take away the last AAA rating that he had left – today is just a color note.
Repercussions? None. La Paz also reigns on Wall Street. That the stock market celebrates the fiscal package does not surprise. He did it in a climbing campaign without pause when the discourse of the two candidates anticipated the deterioration. But, What happened to the “Bond Vigilantes”, who previously hit the cry in the sky? Where is your obfuscation? It does not exist. His alarm went out. Like the Republican representatives who opposed the package, but then voted in favor, the treasure bonds, Zigzagued and moved an opinion. They went from expressing their frontal rejection to mutis by the forum. The rates at ten years, last week, fluctuated between 4.20% and 4.35%, away from the 4.80% ceiling that fleet fleetingly touched on the edge of the biden mandate. The Congress was not excited, yes the Employment Report that registered the creation of 147 thousand new net jobs. As he filed the expectations that the Fed could the rates at its next meeting, 10 base points uploaded.
Treasury’s strategy
How do you explain the sudden lack of fiscal zeal of fixed income vigilantes? The Treasury Secretary, Besent, convinced them that they will not be summoned to finance the increase in deficit. Even, he already made repurchases of long bonds in circulation. The treasure will place short-term debt: letters (T-Bills). The bond offer will not increase in parallel, and its participation in the debt mix will be reduced. As the fiscal package lifted the debt roof, Besent will use short -term letters to resume resources. And the quarterly refinancing will also be sought towards a greater incidence of the letters in the total menu. I mean, They will live with a larger deficit (Although Besent says no, pointing to extra collection for tariffs) next to a lower bond emission. The gap will be covered with treasure letters, whose volumes in circulation must grow substantially.
What do these changes mean? The treasure modifies the slope of the yield curve. Flasty the yields of the long part knowing from the growing red prosecutor and natural pressure. It will concentrate the anchorage, then, on the front section. And thus gets into the field where Fed operates. The letters are short -term. Its rates, in principle, arbitrate closely with the Fed Funds rate. Of course, with a flood of letters this could be altered. Hence Besent works with piecework to encourage a demand for robust letters that favor its absorption. The regulators, by case, are preparing to cut the requirements of supplementary liquidity of the bank. The lower house, next week, will deploy a crypto festival in which it will deal with three key laws. One of them, the Genius Act, will promote the massive use of the stablecoins, cryptocurrencies that replicate the behavior of the dollar in the digital field. The legislation will require that they retain 100% support in dollars or in Treasury letters. As the letters accrue an interest, and enjoy abundant liquidity, a new reef will emerge there. Besent thinks that, in time, it could mean an additional demand of 2 billion dollars. Everything is to reconcile an increasing deficit with low rates. And to cross your fingers so that inflation does not accuse the rise of tariffs.
The only exception is the dollar
Wall Street celebrates in peace. It has no objections. Besent exchanged the macro suspicion of the bonds for the micro ambition to pocket a capital gain. The only exception is the dollar. He was bleeding in April and bleeds a little more now. When the euro reaches 1.20 it will be Europe that will complain and actively operate in its defense. The ECB has already sliced its rates eight times in the year and will not refuse a novena. Other central banks will respond in the same way, trust Besent, to avoid a strong appreciation of their coins. My policy is strong dollar, he holds unpaid.
The projections of the fiscal result depend critically on the evolution of the interest invoice. From there, the pressure Trump applies to another Republican, Jay Powell. He placed him at the head of the Fed in 2018 instead of Janet Yellen. However, Powell does not see its requirements to already facilitate a substantial cut of interest rates. What will the Fed do? Nothing in July, thanks to the employment report. It will examine inflation (June, July, August and September) before the September 16 and 17 meeting. With an economy that gradually fatigue, if inflation does not corcovea, the Fed will resume rates. Although, without the vigor or the rush that Trump and Besent crave. With a renewed ongoing fiscal expansion (and the inflator of the debt), a growing supply of cash -lick substitutes, letters and stablecoins – and the control of the yield curve at the hands of the treasure, not only the independence of monetary policy is threatened. So is its effectiveness.
Source: Ambito
