Markets Must Now Focus on US Budget Data
  • May 10, 2017 07:34 am
  • by Bill Cara
As negotiations are now underway in the US congress for the Trump FY2018 budget, my thoughts are that this is going to be one of the most contentious in modern history. A week ago, Congress passed the American Health Care Act, which repeals much of Obama’s Affordable Care Act and already Insurers, Hospitals and Doctors are furious while millions of Americans who will lose coverage are shocked. The upcoming budget cuts are also going to be shocking to most Americans.

In my view, budget cuts are essential; however, Trump is trying to reduce government spending levels over the next two to four years that I believe are only possible over ten to 12 years or more. I anticipate even greater conflict in Congress over government spending than occurred over healthcare. Should the broad economy suffer as a result of extreme pressures to change it, I foresee a unified investor reaction that would weaken the US Dollar, which would send commodity and precious metals prices higher.

So, with that said, I feel it important to be monitoring the upcoming monthly budgets so we can get our heads around the process. Nasdaq and Econoday provide a good source of information via the following link:

 US Treasury Budget to be released at 2:00pm ET

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance reflect Federal policy on spending and taxation. The government’s fiscal year begins in October.

Why Investors Care
The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it’s simple supply and demand — if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether — the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.

The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government’s tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.

Highlights of April Release

After March’s $176.2 billion deficit, the government’s deficit 6 months into fiscal 2017 is at $526.9 billion and running 15 percent over last year. The receipts side of the ledger is down 0.2 percent and includes an 18 percent decline in corporate income taxes. The outlays side is up 3.3 percent with net interest, reflecting comparatively high U.S. interest rates, up 15 percent and with Medicare showing a 4.8 percent gain. If not for special factors (calendar timing of receipts and payments), the government’s deficit would be a year-to-date $564.0 billion or 23 percent above last year.

The next report is for the tax month of April and will be of special importance.

That report is released today at 2:00pm ET.

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