Following last week's torrid surge in the dollar on the back of a panicked flight to safety, the greenback has weakened for a second day amid concerns President Donald Trump’s budget proposal - to be released later today - will drop a longstanding Republican Party goal to balance the budget in 10 years in a "historic reversal", as we first reported last night. As a result, the Bloomberg Dollar Spot Index fell 0.3% amid muted trading in Asia after dropping 0.1% Friday.
Among other spending measures, Trump will seek billions of dollars in new spending to build a border wall, improve veterans’ health care and combat opioid abuse, according to a White House statement.
The U.S. budget plan "has raised some concern that we could see a rising fiscal deficit at the time when the current-account deficit in the U.S. is also weakening," Khoon Goh, head of Asia research at Australia & New Zealand Banking Group told Bloomberg. "That could point to further U.S. dollar weakness."
Commenting on the Trump budget, Cowen’s Jaret Seiberg writes that the President's budget, due to be released this morning, will likely be "a disappointing document" for those seeking policy blueprints, with fewer-than-usual headlines on GSE reform, student lending and deregulation. Cowen keeps expectations low about housing finance; budget may include broad call to end Fannie, Freddie conservatorships rather than detailed path forward for GSEs
As a result, Seiberg urges caution regarding any potential news about student lending (like consolidating federal loan programs, capping amounts students may borrow) as Democrats aren’t on board with curbing federal loan programs; HEA reauthorization would need 60 votes in Senate; sees no path forward in this Congress for changes that would benefit private student lenders. "Wouldn’t read too much into anything regarding financial deregulation, which is in regulators’ hands."
More importantly, Cowen writes that it will be closely watching how markets react to news Trump will abandon the traditional GOP call to balance the budget; that may reinforce market concerns about deficits, need to issue debt, which may lead to higher interest rates.
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Meanwhile, the JPMorgan Global FX Volatility Index rose to the highest since April as investors awaited US CPI data on Wednesday to assess the outlook for Federal Reserve policy tightening. As discussed yesterday U.S. inflation probably quickened to 0.3% m/m in Jan. from 0.2% in Dec., according to economist estimates before this week’s data
“Should U.S. CPI print very strong, it will lead to expectations of a faster Fed tightening, which will in turn hit stocks and spur buying of the yen,” says Satoshi Okagawa, senior analyst at Sumitomo Mitsui Banking Corp. in Singapore
And while growing budget deficit - and how it is funded - concerns have pressured the 10Y, whose yield rose to 2.88% as 10-year note futures fall 15/32, the real action has been in the 30Y, where the yield is back to March highs, rising to 3.18%.
So far, equity algos are ignoring the renewed bond rout, perhaps focusing more on the curve steepending, which however will soon flatten as the Fed continues with its 3-4 rate hikes over the course of the year.