US: Budget deficit on track for $1 trillion in 2020 - Westpac

Sean Callow, Research Analyst at Westpac, notes additional deterioration in the US fiscal position before as highlighted by the latest CBO report, which is the benchmark for US budget analysis.

Key Quotes

“On the positive side, the CBO raised its forecasts for GDP and inflation and lowered its unemployment projections. But it now sees a 2018 deficit of -$804bn, $242bn larger than in the June 2017 projections. This is around -4.2% of GDP. For reference, Australia’s 2017/18 deficit is projected to be -1.3%.”

“The CBO estimates that US deficits over 2018-2027 will be $1.6trn wider than in the June report, with policy changes adding $2.7trn to deficits but faster growth contributing $1.1trn to the bottom line. The US 10yr Treasury note traded 2.30-2.40% in Dec 2017 before the passage of the tax reform bill, selling off as far as 2.95% in February.”

“Increased equity volatility has helped the 10yr since then but it remains to be seen how foreign investors respond. Wire “sources” claim China has been switching to euros but official data is released with a long lag and plenty of caveats. It does seem plausible that the US fiscal position is one reason the US dollar remains weak despite a hawkish Fed.”