US Budget Deficit Swells

For the week ending 21 June 2024

Global equities advanced modestly this week, reaching record levels at midweek. The yield on the benchmark US 10-year Treasury note rose slightly to 4.25% while the price of a barrel of West Texas Intermediate crude oil gained $3 to $81.30. Volatility, as measured by the Cboe Volatility Index (VIX), edged up to 13.6 from 12.5 a week ago.

MACRO NEWS

CBO boosts US deficit forecast

The Congressional Budget Office on Tuesday substantially revised its 2024 US budget deficit estimate upward to $1.9 trillion from a February estimate of $1.5 trillion while raising its forecast for the deficit to GDP ratio to 6.7% from 5.3%. The revisions come after the CBO incorporated recent additions to government spending, including President Joe Biden’s student loan forgiveness plans, which added $145 billion in red ink, aid to Ukraine, Israel and Taiwan, which helped to boost discretionary spending by $60 billion, a $70 billion reduction in the estimated amount the Federal Deposit Insurance Corporation will recoup from payments made to cover bank failures in 2023 and 2024, and an increase in estimated Medicaid spending.

France, six other EU nations warned over excessive deficits

The European Union on Tuesday warned France, Italy, Belgium, Poland, Malta, Slovenia and Hungary that their fiscal deficits are too high and will need to be addressed in the coming months. The warning comes amid a French parliamentary election campaign in which none of the three main political blocs are pledging fiscal discipline. EU rules typically require member countries to maintain budgetary discipline or face hefty fines if debt climbs above 60% of gross domestic product or if budget deficits reach more than 3%. France is in debt to the tune of around €3 trillion, or more than 110% GDP, and a deficit of €154 billion, representing 5.5% of economic output. Since his party’s poor showing in European Parliamentary elections in early June prompted President Emmanuel Macron to call early elections for the French parliament, the spread between French 10-year government bonds and their German equivalent has widened about 0.28% to almost 0.80%. That’s the highest level since the runup to the 2017 French presidential election. Marine Le Pen, head of the National Rally (RN) party, which is leading in opinion polls, said this week that the party is respectful of institutions and will not seek Macron’s resignation if RN secures a mandate to form a government. Jordan Bardella, who will lead RN in France’s lower house if the party wins, sought to calm market jitters, vowing “fiscal seriousness” if elected.

Despite inflation hitting target, BOE holds rates steady

Consumer prices rose 2% year over year in May, falling to the Bank of England’s target level for the first time in two years. Despite the good news at the headline level, services inflation remained highly elevated, at 5.7%, which kept the BOE on the sidelines when the Monetary Policy Committee met on Thursday. Dovish commentary from the BOE after the meeting prompted investors to price in a rate cut in the next meeting or two.

QUICK HITS

European Central Bank Chief Economist Philip Lane says the ECB currently believes there is little reason to consider activating its relatively new, but as yet untested, emergency bond-buying powers to support eurozone debt markets amid turmoil spawned by the upcoming French elections.

Analysts at Goldman Sach say the US labor market is at an inflection point where a further softening in demand would hit actual jobs, not just open positions, and could push the unemployment rate higher.

President Biden announced a new program Tuesday that provides a path to citizenship for hundreds of thousands of undocumented immigrants married to US citizens.

US retail sales rose 0.1% in May after April data were revised down to -0.2%. Core sales rose 0.4% after falling -0.5% in April.

US industrial production rose 0.9% in May, far exceeding estimates.

Amid a visit to Pyongyang by Russian President Vladimir Putin, Kim Jong Un vowed to unconditionally support Russia in its war with Ukraine and the two leaders signed a mutual defense pact.

Canada’s population grew 0.6% in the first quarter of 2024 and 3.2% million from a year ago to 41 million. Over the past two years, the country’s population has risen 6.3%. According to Statistics Canada, 99% of the growth was due to immigration.

On Thursday, the Swiss National Bank cut interest rates 0.25% to 1.25% in an effort to offset the Swiss franc’s attractiveness as a safe haven amid tumult in neighboring France. Norway’s Norges Bank held rates steady.

The lowest mortgage rates since April have yet to give US housing markets much of a lift as May housing starts fell 5.5% from the month before to the lowest level since early in the pandemic. Building permits fell 3.8%. Existing home sales fell 0.7% in May to a 4.1 million unit annual rate.

The minutes of the June meeting of the Bank of Japan signal the potential for the central bank to hike rates as early as July.

Late this week a cyberattack on a vendor that provides dealer management software disrupted sales and service operations at nearly 15,000 auto dealerships in the US and Canada, potentially weighing temporarily on retail sales and GDP.

US Federal Reserve officials John Williams and Neel Kashkari each said this week that it could take a year or two for inflation to fall back to the Fed’s 2% target.

The Japanese yen has weakened to levels against the US dollar (near 159) that sparked intervention from the Bank of Japan in April.

UK retail sales rebounded in May after a soggy performance in April amid poor weather. Sales rose 2.9% from the month before.

In a flashback to the global financial crisis, the Financial Times reports that credit ratings agencies have mis-rated more than $100 billion of commercial real estate debt, maintaining high investment grade ratings on single-loan bonds even though the borrowers are in default.

President Joe Biden and former President Donald Trump are preparing to debate on Thursday, 27 June, the earliest general election debate in US history.

Flash readings for June purchasing managers’ indices were weaker in most regions, though the US showed across-the-board improvement.