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. Read More Details
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