Fiscal imbalances, political risks and global economic uncertainty drive market sentiment
This week's chart pack covers the following topics:
US government deficit surges despite strong economic conditions
Macrobond users can click here to access the chart and gain deeper insights into the data.
Macrobond users can click here to access the chart and gain deeper insights into the data.
What the chart shows
Both charts use outlays and receipts data from the US Treasury to illustrate how government revenue supports current spending. The first chart breaks down the sum of government receipts over the past 12 months. It also highlights the $1.83 trillion deficit – the gap between revenue and spending. The second chart builds on this, showing the 12-month rolling sum of receipts as a percentage of total spending and how the composition of these receipts has evolved over time.
Behind the data
Over the past year, the US government has spent $6.75 trillion but only collected $4.92 trillion in revenues, leaving a $1.83 trillion shortfall. This deficit, accounting for 27% of all government spending, is financed through the issuance of Treasury securities, effectively borrowing to cover the gap.
Such hefty deficit spending raises concerns about sustainability, especially given the current economic environment. The US economy is experiencing solid GDP growth, a healthy labor market and cooling inflation – conditions typically associated with lower deficit spending. However, the fact that the deficit remains so large during a period of relative economic strength suggests that it could balloon even further during the next downturn or recession. Without significant adjustments to revenue or spending, the government’s reliance on borrowing is likely to increase, adding further pressure to fiscal sustainability.
10-Year Treasury yields diverge from macro conditions, signaling inflation risk
By Huw Roberts , Head of Analytics, Quant Insight
Macrobond users can click here to access the chart and gain deeper insights into the data.
What the chart shows
This chart consists of two panels, each offering a perspective on the relationship between US 10-year Treasury (UST) yields and macroeconomic conditions. The bottom panel tracks the "Qi Fair Value Gap.” The grey horizontal line separates periods where UST yields are either "too high" (above) or "too low" (below) compared to fair value based on macroeconomic inputs. The chart highlights how the 10-year UST yield has stayed mostly below its fair value until recently, indicating that yields are now above macroeconomic expectations.
The top panel compares the actual UST 10-year yield with the Quant Insight (Qi) model value, which represents the expected yield based on macroeconomic factors. Grey boxes highlight instances where the yield "catches up" to macro conditions. Recent data shows that UST 10-year yields are at their highest divergence compared to what macro conditions would suggest, signaling that current yields may be overextended relative to fundamentals.
Behind the data
There are two key takeaways from the Qi model. First, the ‘Qi Fair Value Gap’ indicates that 10-year UST yields currently screen as approximately 12.5 basis points too high relative to aggregate macroeconomic conditions. This divergence of +0.5 sigma is modest, but it's the largest positive gap observed in the past year. This suggests that while yields are not drastically misaligned, they are now at an elevated point compared to the macroeconomic backdrop.
Second, the model highlights the sensitivity of 10-year yields to inflation, while showing minimal response to GDP growth. This reinforces the view that USTs are no longer serving as a hedge against recession risks, but rather are reflecting inflationary concerns. Despite the dominance of the inflation-driven short-duration narrative, these yield levels may not be ideal for initiating new bearish positions on bonds, as yields have already ‘caught up’ to macroeconomic factors.
Betting markets show nearly 50% chance of Republican sweep in 2024
Macrobond users can click here to access the chart and gain deeper insights into the data.
What the chart shows
This chart tracks Polymarket betting odds for the balance of power following the 2024 US elections. It helps visualize how market sentiment has shifted over time regarding these potential election outcomes.
Behind the data
As the 2024 election approaches, financial markets appear less anxious about the political uncertainties than initially expected. Market participants seem to have grown more comfortable with the range of potential outcomes. According to Polymarket betting odds, there is now an almost 50% chance of a Republican sweep, where Donald Trump wins the presidency and Republicans control both the House and the Senate. Conversely, the odds of a Democratic sweep under Vice President Kamala Harris have diminished, while the likelihood of a split Congress – whether under Trump or Harris – continues to fluctuate.
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