With
tensions in the Middle East subsiding and trade talks stalled with little
visible progress, market attention is focused on one big issue: Trump’s
“big, beautiful bill” of tax cuts and spending
cuts, which Republican lawmakers appear to be aiming to pass before July 4,
Independence Day.
The
problem is that, if passed, it would add more than $3 trillion to the deficit
over the next ten years and raise the debt ceiling by a chilling $5 trillion,
just the opposite of the debt reduction goal Trump has promised during his
presidential campaign, which, by the way, seems to annoy Elon Musk.
As for
how this would affect ordinary people, estimates from the Yale Budget Lab
suggest that the tax, Medicaid, and SNAP changes in the Senate budget plan
would cause the bottom 20% of earners to see their incomes fall by about 2.9%,
whereas the wealthiest 1% would get a 1.9% increase.
Assuming
the bill is passed, how might it affect markets?
One of
the main concerns is that rising debt and deficits could drive up interest
rates. Concerns about the government’s long-term ability to manage its debt
could make foreign investors less willing to buy U.S. Treasuries. Consequently,
for demand to persist, yields would need to become more attractive.
As for
why yields on 10- and 30-year Treasuries have not yet risen despite progress on
passing the budget bill, it is likely because investors continue to expect the
Fed to cut rates sooner than expected. But for that to happen, inflation has to
be kept in check, or trade tensions have to ease quickly.
Another
potential loser from rising debt could be the dollar, which is already
struggling, with the
dollar index falling below 107 points. With rising debt,
the purchasing power of the U.S. currency will most likely continue to decline
rapidly. Subsequently, goods priced in dollars will become more
expensive.
For
stocks, higher yields could make companies’ borrowing more expensive, hurting
their profits. On the other hand, Morgan Stanley says the stock market tends to
track the economy more than changes in tax rates. Also, since the 2025 tax cuts
mostly extend current rules, they probably won’t have much impact.
Finally,
if confidence in the dollar weakens in the case of cryptocurrencies, Bitcoin prices could
unexpectedly rise. Predictions like Cathie Wood’s and Michael Saylor’s that
Bitcoin could surpass $1 million might not seem so unrealistic then. But for
now, BTC isn’t benefiting from the budget bill.
This article was written by FL Contributors at www.forexlive.com.