Date: July 31, 2018
United States:
Treasury Sees Second-Half U.S. Borrowing at Most Since 2008
The Treasury Department predicted the U.S. government’s borrowing needs in the second half of this year will jump to the most since the financial crisis a decade ago as the nation’s fiscal health deteriorates despite a strong economy. The department expects to issue $329 billion in net marketable debt from July through September, the fourth-largest total for that quarter on record and higher than the $273 billion estimated in April, Treasury said in a report Monday. The department’s forecast for the October-December quarter is $440 billion, bringing the second-half borrowing estimate to $769 billion, the highest since $1.1 trillion in July-December 2008. The estimates were “quite a bit higher than our expectations,” Thomas Simons, senior money-market economist at Jefferies LLC, said in a note. The yield on U.S. 10-year rates edged higher to almost 2.98 percent following publication of the borrowing outlook, but remained within its daily trading range. The two-year rate was steady around 2.67 percent, close to its low for the day. The Treasury is boosting sales of bills, notes and bonds to help finance a budget gap that’s widening after President Donald Trump signed $1.5 trillion in tax cuts late last year and the Republican-controlled Congress approved a roughly $300 billion spending increase. The deficit totaled $607 billion through the first nine months of the fiscal year that ends Sept. 30, compared with $523 billion from the same period a year earlier. The Congressional Budget Office in late June predicted total government spending would exceed revenue by $1 trillion in 2020. But administration officials say a stronger economy will boost government revenue and help shrink the budget deficit. Treasury Secretary Steven Mnuchin said Sunday the U.S. economy is “well on the path” for four or five years of sustained annual growth of 3 percent. Gross domestic product accelerated in the second quarter to the fastest pace since 2014, the government reported on Friday, allowing Trump to link the increase with his economic policies. The second quarter may prove to be a high point for the world’s largest economy, though, and few economists expect it to attain the president’s goal of sustained growth of 3 percent.
Europe:
Italian Economic Growth Slows to Weakest in Almost Two Years
Italy’s economic growth slowed to the weakest pace in almost two years, possibly spelling trouble for the populist government’s costly projects. Gross domestic product expanded 0.2 percent in the three months through June, down from 0.3 percent in the first quarter, statistics agency Istat said Tuesday in a preliminary report in Rome. The latest figure matched the median estimate of 26 analysts in a Bloomberg survey. It was the lowest quarterly growth since the third quarter of 2016. Istat said foreign trade was a drag on economic expansion while domestic demand supported it. Italy is still trailing behind the euro area as a whole, which itself slowed to 0.3 percent growth in the second quarter, according to figures released earlier in the day. Political leaders in Rome will work out a budget after the summer vacations, with tensions among the governing parties expected to flare up. Italy’s draft budget plan is due in Brussels by mid-October for a review by the European Union. In another potential trouble spot, Istat said the Italian unemployment rate rose to 10.9 percent in June from 10.7 percent the month before. Deputy Premiers Luigi Di Maio and Matteo Salvini have insisted on pressing forward with their plans for lower taxes and more income support for the poor. Finance Minister Giovanni Tria says he supports those plans while insisting the country must live within its financial means. Full implementation of the government’s program could cost as much as 126 billion euros ($148 billion) in its first year, according to Carlo Cottarelli, a former International Monetary Fund executive. Italy has suffered from years of near-stagnation and the European Commission confirmed earlier this month it expects the country to have the slowest growth rate in the 19-nation euro region this year and next.
Euro-Area Economy Gets Higher Inflation But Weaker Growth
A bumper day of euro-area economic releases showed the region’s vital signs remain good, if not great. The region’s economic expansion entered a sixth year but growth slowed to just 0.3 percent, the weakest in two years. Inflation accelerated further above the European Central Bank’s goal, though that was largely driven by stronger energy prices. Unemployment remained at the lowest since 2008. The data confirm what ECB President Mario Draghi foreshadowed last week: Some of the sluggishness in output in the first quarter continued into the second, while underlying price pressures remains generally muted. But with that assessment came a message of confidence. Policy makers, who are planning to start scaling back stimulus by year end, expect an “ongoing solid and broad-based economic growth” that will bolster wages and produce the right kind of inflation down the line. “So far the ECB is putting a brave face on it,” said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam. “They decided to wind down their quantitative-easing program on the basis that they’re getting increasingly confident about the macroeconomic environment, so I think that they need to continue to tell that story until they really become worried. But there is still quite a lot of uncertainty.” Investors seem to have given the 19-nation economy the benefit of the doubt. The euro remained higher after the reports, trading up 0.17 percent at 12:12 a.m. Frankfurt time, at $1.1726. The yield on German 2-year notes was little changed at minus 0.58 percent. While domestic demand remains generally healthy thanks to rising wages and employment, global uncertainty over the threat of a trade war seems to have left its mark on the region. The ECB has singled out protectionism as a key risk to the outlook, after exports propelled growth last year to the strongest in a decade. Confidence in the euro-area economy slipped to its lowest level in almost a year in July, according to a European Commission report on Monday, with manufacturers’ export orders and production expectations declining.
Asia:
The $500 Billion Market the World Never Thought It Would See
After the financial crisis, China called for a new reserve currency to replace the U.S. dollar. Now it’s swimming in dollar-denominated bonds. China used to rail against the outsize role of the U.S. dollar. But in a major turnaround, the world’s second-biggest economy has started embracing the currency of its larger rival. Chinese companies and banks—and even the government—sold bonds denominated in dollars at a record pace last year, and underwriters expect that growth to continue for years. The roughly half-trillion-dollar market has two key attractions for China’s borrowers. For some, it’s an easier place to raise cash than at home—where regulators are cracking down on leverage. For others, dollars are simply easier to use to fund acquisitions and investments abroad. The upshot: There’s a large and growing supply of dollar securities that offer exposure to Chinese companies for investors wary of diving into the country’s increasingly accessible yuan-denominated domestic debt. The offshore bond market is also set to provide a stake in President Xi Jinping’s “Belt and Road” initiative (BRI)—a grand plan that envisions deepening trade and investment ties with countries across the Eurasian landmass and beyond. Bankers see the BRI as a key source of growth in Chinese dollar bonds. “To hedge the escalating trade tensions with the U.S., China will become even more committed to the BRI, which is China’s form of globalization,” says Ken Hu, chief investment officer for Asia Pacific fixed income at Invesco Hong Kong Ltd., which has introduced a fund to invest in what’s also known as the Silk Road project. “We expect increasing new Chinese dollar-bond issuance to relate to the BRI.” The irony of using dollars to fund a globalization project that helps counter President Trump’s “America First” doctrine is all the richer coming nine years after China blasted the global financial system’s overreliance on the greenback. In the depths of the global financial crisis, then-People’s Bank of China Governor Zhou Xiaochuan called for the creation of a new unit of exchange “disconnected from individual nations” and designed according to rules. The heads of the U.S. Department of the Treasury and Federal Reserve swiftly rejected the March 2009 call, assuring a dead end for the proposal at the one institution capable of overseeing a global currency: the International Monetary Fund. (As the IMF’s largest contributor, the U.S. essentially holds veto power over major decisions.) Undeterred, China’s official Xinhua News Agency in 2013 repeated the call for a global currency.