What the Business Media is Reporting
After the November 2016 presidential election, the new rallying cry was the “Trump Effect” as supporters of the newly minted president sold the narrative that Mr. Trump’s administration would be good for the financial markets and the economy as a whole. Mr. Trump’s Twitter pronouncements on NAFTA, manufacturing, and trade with China seemed to embolden markets, but as noted in this article in The Financial Times, Mr. Trump’s tweets no longer get the attention of traders.
What is getting the attention of traders? According to Bloomberg.com, among trader concerns are the dovish comments of central banks. The Federal Reserve has been signaling that it may take a break from rate hikes. Low yielding debt, according to Bloomberg analysis, has been scaring investors, however, increases in yields scare asset managers given the threat to values that result from the inverse relationship between yields and asset prices.
Bloomberg estimates that, under the rule of duration, a full percentage point increase in yields could result in a seven percent erosion in market value. The bond markets may be looking at a $2 trillion loss.
Government Moves Traders Should be Concerned About
This is budget season as committees in Congress review agency requests. According to the Congressional Budget Office, the U.S. government is facing a Fiscal Year 2019 budget deficit of $897 billion. Unless the government can close this gap with increased revenues or less spending, it will go into the debt markets, issuing bonds to help close the gap.
As the deficit widens, there will be an increase in supply of government bonds, a fall in bond prices, and an increase in interest rates. Funds will be taken out of the private sector portion of the economy and move into government coffers. In other words there will be less money available to invest in factories, plant, and other infrastructure necessary for economic growth.
While the Federal Reserve gets a lot of play in the media, traders should not allow the glitz that the media paints on the central bank to distract them from the budget activities of Congress. Congress, as keeper of the purse strings, has a key role in managing the economy. Its processes, while a lot more mundane than a presidential tweet, are important to monitor.