US: Budget can change fortunes for equities? - Rabobank

President Trump presented his plans for a US budget yesterday, while equities were recovering from last week’s sell-off and while timing was perfect for the US President to boast about his positive impact on the stock markets, the first positive day-on-day change for the S&P 500 and the Dow in a week was more of a coincidence than it was caused by the President’s proposals, explains the research team at Rabobank.

Key Quotes

“First off, the President’s budget is exactly that, a proposal. Congress ultimately decides how much money is spent, and where; the President can only flag his priorities for the upcoming year(s). Going by this budget, these priorities still seem to be Trump’s infrastructure project, the Great Wall, and a large increase in military spending. However, Trump’s promises to leave Medicare untouched had to yield. Part of the additional spending was made up for by lowering social security spending, and Trump is additionally calling for cuts to other, non-military expenditures.”

“None of these plans are likely to gain much traction in Congress, after Congress already agreed on a two-year budget deal that increases military and non-military spending by USD 300bn. Mr. Trump’s proposal only cuts USD 57bn from 2019 spending plans in the bi-partisan budget agreed late last week, and interestingly the President has shifted out his own deadline for a balanced budget to 2039 – a projection which is aided by strong, and perhaps optimistic, estimates for economic growth.”

“The US deficit –and lack of urgency in the US government– is gaining increasing attention, both from officials and from markets. As Mr. Blanchard put it, “it’s the wrong timing for a deficit” now that the US economy is expanding relatively quickly. Indeed, the timing could have been better. Further loosening of the fiscal reins, adding to government debt, could put further upward pressure on US yields. Moreover, were Trump’s budget plans to be adopted and were these plans, together with Trump’s tax reforms, to lead to higher growth, this could force the Fed to speed up its tightening pace – again adding to higher yields. Admittedly, those are still a lot of ‘ifs’.”