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Investors Must Watch Bond Market for Signs of Economic Strain

Investors Must Watch Bond Market for Signs of Economic Strain
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Thursday, 08 February 2018 07:37 AM Current | Bio | Archive

In the United States we have an important debate that looms over the budget. A deal does appear to have been done in the Senate that would keep the U.S. government open for 2 whole years, mainly by showering money like confetti that is estimated at about $300 billion over the U.S. economy.

The Senate seems likely to pass the measure, but its passage in the House is not a foregone conclusion.

As proof of that, Representative Nancy Pelosi of California, the House Democratic leader, took the House floor on Wednesday morning in opposition, protesting that the deal did nothing to bring lawmakers closer to protecting young immigrants brought to the country illegally as children. She then delivered a record-breaking speech that tied up the House for the entire day and into the night.

House Democrats want a commitment to a debate on immigration, which has been given in the Senate, and without democrats support, the bill is unlikely to pass as there are enough Republicans intending to vote against what they see as essentially a deficit raising measure.

Meanwhile, President Trump is seemingly backpedaling from the desire to shut down the government.

Investors could do well watching the bond market as the idea of tax cuts and more spending in an economy that has full employment and a large budget deficit is an interesting challenge to the conventional economic thinking.

Watch out when the 10-year yield will rise through 3 percent. The 10-year yielded yesterday 2.84 percent.

By the way, the Congressional Budget Office (CBO) just informed us in its Monthly Budget Review that it estimates the federal budget deficit at $174 billion for the first four months of fiscal year 2018, which is $16 billion more than the shortfall recorded during the same period last year.

Yes, food for thought.

Meanwhile, over in Europe and because Germany, when measured by its nominal GDP is the world’s fourth (4th) economy after the U.S., China and Japan with $3,651 billion in 2017 as measured by the IMF, it could be worth for any investor keeping any eye on what goes on politically at the top in Germany.

Yesterday, the German government coalition negotiations have moved another step further forward.

Chancellor Merkel's conservative bloc (CDU-CSU) has finally agreed a coalition deal with the center-left Social Democrats (SPD) to form a government. The BBC calls it: “Germany coalition deal: A marriage of convenience, not love.”

A compromise between Chancellor Merkel's conservative bloc (CDU-CSU) and the center-left Social Democrats (SPD), which are 2 parties from opposite sides of the political spectrum could be, at least for the optimists, very good at finding something for everyone. But the danger is that by trying to please everyone, you they could end up pleasing no one.

We got also German trade data today, which may have a slightly heightened importance against the backdrop of the rising U.S. trade deficit that just hit its highest level since 2006.

Overall exports from Germany rose 3.9 percent year-on-year to EUR 100.9 billion or about $124 billion in December 2017.

Germany is the third largest exporter in the world, with exports accounting for almost a half of its economic output while the United States is its main export partner that counts for about 10 percent of Germany’s total exports.

Remember that at the end of May of last year at a NATO meeting in Brussels, Belgium President Trump had harsh words for Germany when he reportedly referred to the Germans as “bad, very bad.” Gary Cohn, the president’s top economic adviser, later clarified that Trump was referring to Germany’s trade practices.

It must be said that President Trump had a point when he criticized the U.S.-Germany trade deficit because the German exports are really artificially inflated by, for example, the still undervalued euro and the ECB’s monetary policy.

Finally, the head of the World Bank and the Head of the BIS, which is an umbrella organization for the world’s central banks have both used the phrase “Ponzi schemes” to describe cryptocurrencies.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Investors could do well watching the bond market as the idea of tax cuts and more spending in an economy that has full employment and a large budget deficit is an interesting challenge to the conventional economic thinking.
investors, bond, market, economic, strain
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2018-37-08
Thursday, 08 February 2018 07:37 AM
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