Equites advanced yesterday on optimism the Federal Reserve will be able to engineer a soft landing, which would bolster the outlook for corporate earnings. Financial shares led the advance even has two mega caps—AAPL and GOOG—stumbled.
The economic data continued to paint a picture of strength, a backdrop which the bond market ignored given that prices were essentially unchanged.
Changing topics, the WSJ penned an editorial that questions the fiscal sanity of the President’s $7.3 trillion budget. The last year of the Obama Administration the federal budget was $4 trillion. Many thought the trajectory then was unsustainable. In 2020 the Trump Administration had a $6.8 trillion COVID induced budget, driven by what ere then thought to be one off outlays.
That thought has been proven to be wrong.
Annual budget deficits are around $1.5 trillion for the foreseeable future. The question at hand is how will the country be going to pay these planned expenditures? [Note: The budget is believed to be dead DOA]
The national debt is around $34 trillion and interest expense on this debt is about $1 trillion and climbing. Four years ago, interest expense was about $350 billion. Writing it differently, how would a household cope if their interest only mortgage payment went from $350 month to a $1,000 month. Talk about the ultimate exploding arm.
Many, including FRB Chair Powell, have warned about the unsuitability of the federal budget and some have used the analogy of walking purposely into a buzz saw.
At this juncture neither society nor the markets are concerned. Unfortunately, history suggests only a crisis will galvanize the voters and Washington’s attention.
Wednesday FRB Chair Powell stated the Quantitative Tightening (QT) will conclude shortly. The Federal Reserve’s balance sheet is still massive. Some have openly stated the Committee is concerned about liquidity given that over $9 trillion in net treasury issuance is forecasted for the next 12 months. Who will buy this debt, an environment amplified by Fed selling.
Is this a reason why the markets viewed the outcome of the meeting as more dovish than hawkish? Some think yes.
Last night the foreign markets were mixed. London was up 0.80%, Paris down 0.14% and Frankfurt up 0.11%. China was down 0.94%, Japan up 0.18% and Hang Seng down 2.16%.
Futures are flat. The 10-year is up 5/32 to yield 4.25%.
