US: Treasury Budget

Wed Jun 10 13:00:00 CDT 2015

Consensus Consensus Range Actual Previous
Treasury Budget - Level $-97.0B $-96.0B to $-97.5B $-82.4B $156.7B

Receipts are strong for the government with individual taxes up 12.4 percent seven months into fiscal 2015. Corporate taxes, a much smaller component than individual taxes, are up 10.8 percent. Turning to the other side of the ledger, spending is up 4.0 percent including a 2.8 percent increase for Medicare and a 4.4 percent increase for Social Security. Defense spending is down 3.3 percent. Fiscal year-to-date, the government's deficit is running 16.3 percent below last year, at $365.2 billion vs $436.4 billion this time last year. Note, however, that calendar timing for spending is inflating the gain, excluding which the deficit is running about 9 percent below last year. For May alone, the government's deficit was $85.0 billion.

Market Consensus Before Announcement
Taxes have been higher this year but Medicare spending is up, keeping the gap in the Treasury budget little changed compared to last year.

The U.S. Treasury releases a monthly account of the surplus or deficit of the federal government. Changes in the budget balance of the annual fiscal year (which begins in October) are followed as an indicator of budgetary trends and the thrust of fiscal policy.

The budget data have several direct and indirect meanings for the financial markets. The most direct relationship lies between the size of the budget deficit and the supply of Treasury securities. The higher the deficit, the more Treasury notes and bonds the government must sell to finance its operation. From there it's simple supply and demand -- if demand is constant but the supply of bonds goes up, the price goes down. The same is true if the deficit falls or is eliminated altogether -- the government needs to sell fewer Treasury bonds, so the supply drops and the price of T-bonds rises. In the past few years, the budget deficit has increased dramatically, and this has put more Treasury securities into the market place.

The Federal government borrows money through the issuance of Treasury securities; so higher deficits mean a larger supply of securities and (again, assuming constant demand) lower prices. With notes and bonds, lower prices are equated with higher yields, so in this example, the government borrows money at higher interest rates. That impact ripples across all other interest rate-bearing securities and creates a higher interest-rate environment for stocks, which is bearish.

In addition to following the trend in the budget deficit or surplus, investors can gain valuable insight to the state of the economy by looking at the government's tax receipts. Higher tax receipts lead to an improved deficit situation when economic conditions are strong; conversely, lower tax receipts reflect a sluggish economic environment.