Focus at the start has been on the US budget arrangements that have been under consideration recently.
Yesterday it was announced that, following tense negotiations, a deal had been made between President Trump and congressional leaders. The deal was regarding US debt and budget levels.
The agreement is viewed as a relief due to the fierce level of opposition between republicans and democrats. The republicans are looking for increased defense spending whereas the democrats would rather focus on increased social spending.
“No Poison Pills”
Using his typical medium, Twitter, Trump said:
"I am pleased to announce that a deal has been struck with Senate Majority Leader Mitch McConnell, Senate Minority Leader Chuck Schumer, Speaker of the House Nancy Pelosi, and House Minority Leader Kevin McCarthy - on a two-year Budget and Debt Ceiling, with no poison pills....”
Trump also added:
“....this was a real compromise in order to give another big victory to our Great Military and Vets!”
What is the agreement?
The agreement outlines plans for $1.37 trillion in agency spending over 2020 and slightly more in 2021. Pelosi and Schumer explained that the deal:
“will enhance our national security and invest in middle-class priorities that advance the health, financial security, and well-being of the American people”.
Further Shutdown Avoided
On one hand, the deal has been viewed as positive as it has helped to avoid another potential government shutdown as well as possibly the first-ever federal default. On the other hand, it has also drawn criticism from many. This is because it has come at a time when US budget deficits are rising to around $1 trillion. This means that for every dollar the government spends it will need to borrow 25 cents.
How Will This Impact Monetary Policy?
Concerns over the impact of such a budget on the future of the economy will no doubt be present in the mind of the Fed. The central bank is widely expected to cut rates at its meeting next month. They have cited the risks and uncertainty around Trump’s ongoing trade wars as the need for such a move.
The prospect of increased US debt over the coming years will add further strain to the US economy. This means that an even higher level of caution from the Fed will be required.
What Does the Deal Cover?
The two key aspects of the deal are:
1: an increase in the debt limit to avoid the US defaulting on payments for the first time in history
2: agreeing on an overall spending limit and preventing automatic spending reductions from taking place at the pentagon and other domestic agencies in January.
What About Trump’s Wall?
The issue of government spending has been a fiercely debated topic over Trump’s presidency due to his push to secure funding to build a wall along the US border with Mexico. It was this a dispute over funding for the project that leads to the longest-ever US government shutdown over December 2018 and January 2019.
Following an appeal to the court’s decision to rule against Trump’s application for funding, Trump is now waiting on a Supreme Court ruling by July 26th. This will determine whether he can access a portion of funds within the defense budget to build his wall.
Essentially, Trump aiming for approval to use a portion of funds ($2.5 billion) which were originally intended to fund salaries, expenses and retirement benefits for the Department of Defence. However, as these costs transpired to be lower than expected, Trump is now looking to have the money “reprogrammed” for us on his wall.
US equities have displayed a sense of relief over a further government shutdown having been avoided. SPX500 trades 2993.08 last as price continues to move higher within the corrective bearish channel which has formed on the retracement from recent highs. Bulls will be looking for a break above the channel top, along with resistance at the 3000.39 level, to encourage fresh upside momentum.