US: The looming tower of debt - Westpac

Trade tensions remain foremost in market debate, as US steel and aluminium tariffs which have little direct impact on China look set to be followed by tariffs on a broad range of goods imported from China, apparently as punishment for intellectual property theft, points out Sean Callow, Research Analyst at Westpac.

Key Quotes

“We should see details of this before month-end.”

“This seems to have unsettled US equity markets (S&P 500 down the past 3 days), reinforcing fears that the metals tariffs were just the opening salvo in at least a trade conflict, if not yet a trade war. The US dollar has been under pressure too, falling against all but trade-sensitive CAD over the past week.”

“The US domestic economic story remains upbeat (+313k on non-farm payrolls!) despite some softer data such as wages growth, CPI and retail sales. The FOMC should deliver not only a rate hike next week but a positive narrative and higher growth forecasts, though the median of 2018 “dots” may remain at 3, versus 4 in the latest Reuters survey.”

“US treasury markets will be focused on the FOMC outcome next week as much as FX markets, but in the background, fiscal policy could be having at least as much impact on longer term treasuries as monetary policy. This week the US Treasury released its Feb budget data. February is seasonally a bad month for the US fiscal position, but the -$215bn deficit was the largest since 2012.”

“Spending rose a muted 2% over the year while receipts sank -9.4%, in an early sign of the impact of the tax cut package passed in December. (Nominal GDP grew 4.4% in 2017). As the chart shows, the budget deficit narrowed sharply in 2010-2014 as the economy recovered and the 2011 Budget Control Act restricted spending. This phase is firmly in the rear view mirror, just as the Fed is shrinking its holdings of treasuries bought under the QE programs. This is a heavy burden for US treasuries and a potential danger for the dollar this year too.”