No Love Letters

By Elwin de Groot, head of macro strategy at Rabobank

Financial markets got treated with a surprisingly strong June employment gain in the US yesterday, JOLTing 10y Treasury yields nearly 7bp higher and even more so at the front-end of the curve. Indeed, the market’s change of heart saw the implied probability of a 25bp cut in July fall from 25% to around 5%. That’s back to tail-risk area. European rates – briefly interjected by the US data – remained on a downward path, as recent jawboning from ECB officials on the concerns of a EURUSD exchange rate heading and potentially exceeding the 1.20 level has revived expectations that the ECB could still cut rates after the summer, should such a scenario materialize.

European bond yields also fell partly due to an FT explains, the act is supposed to include all Trump’s promises on fiscal policy in his second term. The bill extends the expiring 2017 TCJA income tax cuts to avoid a fiscal cliff and introduces new deductions for tips, overtime, and Social Security taxes. It increases defence and immigration spending, while offsetting costs through cuts to Democratic priorities. These include ending EV tax credits, imposing tariffs on foreign-heavy renewable energy projects, and reducing federal funding for SNAP and Medicaid. States are expected to cover the shortfall. Additionally, the debt ceiling will be raised at Trump’s request, despite opposition from fiscal conservatives.

On balance, budget deficits are projected to rise by $3.4 trillion over the 2025-2034 period according to the nonpartisan Congressional Budget Office. But this is not how the proponents of the Bill are trying to sell it! On July 1, the Congressional Budget Office (CBO) estimated that the Senate-passed bill would reduce deficits by $0.4 trillion, based on a baseline that assumes the extension of Trump-era tax cuts (TCJA). However, this assumption deviates from the CBO’s 2017 scoring, which expected those tax cuts to expire. By using this altered baseline, the bill appears fiscally responsible, but in reality, it hides the true cost. Or, as Philip puts it: “With a simple shift-in-accounting trick, $3.8 trillion has disappeared into a black hole of time inconsistency.”

More importantly, as Philip notes, the frontloading of tax cuts and spending cut delays will cause a fiscal cliff at the end of 2028 that will create political pressure in 2028 to extend the tax cuts and kick the spending cuts further down the road. Therefore, the upward impact on budget deficits in the next 10 years could be even larger. At the same time, the impact on the economy may prove limited as the extensions of the TCJA have been widely anticipated.

How this pans out remains to be seen of course, but the upward debt trajectory, as envisaged by this multi-annual budget would obviously be something that not only investors but also the Fed will have to weigh.

And this HUGE bill really was just one story out there. Indeed, it is hard to keep up for financial markets participants, let alone businesses, these days when it comes to staying abreast with geo-economic and geopolitical events. We could mention the flaring up of tensions between Azerbaijan and Russia following the deaths of two ethnic Azerbaijanis in Russian custody, or the unsuccessful call between President Trump and President Putin on “Ukraine” yesterday (which follows the US’s decision to stop crucial weapon and ammunition supplies to Ukraine), but if we just stick to trade there is already a long list of potentially wave-making developments.

Just consider the rising tensions between the EU and China leading China to Tyler Durden Fri, 07/04/2025 – 17:56

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