On Our Virtual Route 66 : #RandomThoughts On Our World

 

 

 

How US Fiscal Concerns Are Affecting Bonds, Currencies, and Stocks

As large US budget deficits raise questions about debt sustainability, fiscal concerns are beginning to affect prices for longer-maturity government bonds and the US dollar. There are signs, however, that the country's equity market will power ahead this year.  Goldman Sachs Research's economic outlook for the US, meanwhile, is on the cautious side, set against a backdrop of tariff increases: While the US is expected to avoid a recession, its GDP is forecast to grow by only about 1% this year as tariff rates rise, says Jan Hatzius, Goldman Sachs' chief economist, on an episode of The Breaks of the Game podcast. The risk of recession is around 30%, which is double the historical average. “On the economy, it's going to continue to be a slog,” Hatzius says in the episode, hosted by Tony Pasquariello, global head of hedge fund coverage in Global Banking & Markets. While import taxes have had little impact on prices so far, Hatzius expects core inflation to increase by about a percentage point to more than 3% this year.

Concerns about US budget deficits are beginning to drive up yields on longer-maturity Treasuries. Goldman Sachs Research forecasts that the dollar will weaken against other major currencies. Rob Kaplan, Goldman Sachs' Vice Chairman, notes that while Treasuries have long been the world's haven asset, longer-dated bonds haven't rallied this year, even as estimates for economic growth have declined.  “So the question is: Is the 10-year and longer duration still the safe haven, flight to quality, asset?” Kaplan says. Ashok Varadhan, co-head of Global Banking & Markets at Goldman Sachs, expects the Treasury yield curve to steepen: Shorter-term Treasury yields are likely to decline relative to longer-dated Treasuries as the Federal Reserve lowers its policy rate. “The question is whether the data warrants easing a little or a lot,” he says.  Varadhan says he's “super bullish” on equities, even though they've reached all-time highs. There's a tailwind to the US economy from deregulation, he says, and it will be important to assess whether the US manages a fair recalibration of trade and continues to attract the best, brightest, and most able people to its labor market.  “And we're not even in the first inning of companies implementing AI,” Varadhan says. “Once that company implementation happens, you get that productivity dividend.”