Assuming Congress now passes what was agreed upon we now get to test the thesis of a liquidity sucking sound out of private sector assets to fund the refill of the Treasury’s coffers and whether it matters or not. The complexion of the buyers will be important too. To buy many of the T-bills, will the money come out of the Fed’s RRP or will bank reserves get drained or will fresh money into money markets handle some of the weight? Also, while the government spending line will be pretty much set for the next few years, the tax revenue side is definitely not. Treasuries are rallying today on the deal, particularly the short term bills that many avoided on the deal date uncertainty. After this pricing reset, especially for the bills that were maturing between June 1 and the 15th, we’ll see how the market handles the supply.
Also to think about, what happens to economic activity as the government’s base line spending is supposed to grow at a much slower pace than that seen over the past 3 years? My friend Luke Gromen in his weekend piece made a great point, “with Federal spending at around 25% of GDP, deficit cuts would likely drive tax receipts down and deficits higher.” The budget deficit as a % of GDP already stands at around 7%. In recessions going back 40 years, it bottomed at 5-10% at the depths of the respective recession whereas now we’re only dancing with the prospect of one. In the upcoming recession, we’ll see this most likely in double digits.
Specifically with spending, my friend David Rosenberg yesterday pointed out that beginning student debt loan payments will be a cost to the borrower in the aggregate of $5b per month starting soon. Also, the end of the emergency SNAP (Supplemental Nutrition Assistance Program) benefits was about a $50b per year economic stimulus that is expiring. Now there are some offsets like the $5 trillion plus that is in money market funds getting a yield of about 4% which equates to about $200b of newfound income on an annualized basis. About 14 months ago this money which totaled about $4.5 trillion was yielding nothing as we know. But, the differentiation of who is benefiting and who is going to be negatively impacted by the above are certainly not necessarily the same.
In the bank loan data from Friday, C&I loans outstanding rose $1b after falling by $15b in the prior 4 weeks. This slight lift comes off the smallest amount since last October. Bank deposits rebounded by $30b after the drop of $26b last week. It’s uncertain as to how much went into high yield deposits and/or CDs that banks are employing to a greater extent in order to stem the deposit losses. Either way, it’s good to see the rise in deposits but it comes at a big cost to banks relative to the near zero cost of funds they are still offering many.
There was some inflationary relief in Spain as they said its CPI fell .2% in May m/o/m instead of rising by 2 tenths that was expected. The y/o/y gain slowed to 2.9% from 3.8%. The prices of food and energy continued to moderate. Core CPI slowed too but still remains high at 6.1%. Yesterday the Governor of the Spanish central bank said “We think that we still have some way to go in tightening monetary policy, although we also think that we are closer to the end.”
There was notable softness in the May Economic Confidence index for the Eurozone as this index fell to 96.5 from 99 and that was 2.3 pts below expectations. That’s also a 6 month low. Manufacturing, services, retail and construction components all weakened while consumer confidence was little changed but at the best level since February 2022. On the this, the Spanish CPI figure and the US Treasury rally has European bonds rallying too with yields lower.
Eurozone Economic Confidence
With the reelection of Erdogan in Turkey again as the president, the Turkish lira is falling for the 15th day in the past 16 and by 1.4% today after the drop of .7% yesterday. I’d call it a form of sado masochism on the part of the majority of the Turkish voters that wanted him again as president considering the destruction in the standard of living that Erdogan’s policies have brought. The Turkish lira is down 90% vs the US dollar since Erdogan took power.
Speaking of FX, with the Japanese yen weakening to the 140 level vs the US dollar, a government currency official in Japan said “It’s important that currency markets reflect fundamentals and move in a stable manner. Excessive moves aren’t desirable.” So it seems that 140 level is their soft line in the sand and the yen is rallying in response to back under 140.
Yen