It is difficult and even dangerous to draw conclusions from the performances of assorted risk assets on the day preceding a long US weekend. Yet, those involved in equities went home happy and will probably have a relaxing barbecue celebrating Independence Day. The US labour market defied economic gravity and added many more jobs in June than anticipated, a welcome development after Wednesday’s disappointing private payroll figures. The solid data, which some analysts believe masks weakness as half of the increase came from the government sector, whilst hiring in the manufacturing and retail industries slowed considerably, helped equities reach fresh all-time highs and the dollar rebound. The job report will not serve as a catalyst for a speedy rate cut.

Heating Oil, the bellwether of Wednesday’s price jump in our market, came under intense pressure. However, it was more likely the function of book-squaring than a sudden shift in the underlying fundamental outlook. After the drawdown in US distillate stocks reported by the EIA, inventories also fell in Singapore. The European ARA hub registered a rebound in gasoil stockpiles, but they are still considerably under the year-ago level and the long-term seasonal norm. The weekend’s OPEC+ meeting also contributed to the consolidation, and in case the group decides to increase its output by another 411,000 bpd in August, as expected, for the fourth successive month, 2H oil balance estimates will be reassessed and will suggest accelerated swelling in global oil reserves.

Edging Towards the Precipice

One of the cornerstones of chart analysis is the idiom that history repeats itself. It suggests that humans always react to the same event in the same fashion. This may have held true in the past, but in the 21st century, even Mark Twain’s more nuanced version of this mantra, “History doesn’t repeat itself, but it often rhymes”, seems bold, if not dubious.
Undeniably, the second Trump Administration is a far better-oiled machine than the one eight years ago, but the foundations of policy-making remain unchanged: trade tariffs and supply-side economics. What stands out this time, however, is investors’ complete disregard for the implicitly negative impacts of import duties, lower taxes, and deregulation.

There was an audible sigh of relief when a trade deal between the U.S. and Vietnam was announced on Wednesday. Anxiety was mitigated as the original punitive tariff of 46% was reduced to 20%. All good, but it is still twice as much as the 10% universal rate. The announcement coincided with the Senate’s passing of the Trump budget. (Never a dull day.) Once again, it was viewed as auspicious for the U.S. economy. According to a Nomura analyst, it is “unquestionably” better for the U.S. than doing nothing. The American Bankers Association was quick to lend its support to many provisions of the bill, though its main points are ominous.

The Senate version of the legislation returned to the House, where it overcame internal hurdles among Republicans and was passed with a narrow majority of 218-214. The President will sign it into law today.

The bill will cut both spending and taxes. It is forecast to reduce tax receipts by $4.5 trillion and widen the gap in the U.S. budget by well over $3 trillion over the next decade. A yawning budget deficit and falling tax revenues will inevitably force bond investors to demand higher returns when lending to the government. In 2025 alone, around $9.2 trillion worth of government bonds will mature. These higher bond yields will, in turn, elevate the deficit and could compel the Administration to implement further spending cuts, one of the four variables of the GDP equation.

Donald Trump signed the Tax Cuts and Jobs Act in 2017, which lowered taxes for corporations and individuals across most tax brackets. It is set to expire in December, but the new bill seeks to make these cuts, including those on tips and overtime, permanent. The $4.5 trillion in net tax cuts are only partially offset by spending reductions, according to calculations by the nonpartisan Congressional Budget Office (CBO). Yale’s Budget Lab estimates that the poorest 20% of Americans will have to make ends meet with $560 less per year, while the top 1% will see a windfall exceeding $32,000. Demagoguery aside, income inequality will widen, and since the wealthy tend to spend less of their disposable income, consumer spending is likely to suffer, another ingredient of the GDP calculation.

Spending cuts will primarily affect healthcare. The bill proposes slashing healthcare funding by $1.1 trillion over the next decade, with the number of uninsured expected to rise by nearly 12 million by 2034. The lion’s share of the reduction will target Medicaid, the program serving low-income Americans, many of them die-hard MAGA supporters. While healthcare spending is being curtailed, military and border security funding will be expanded. Defence will receive $150 billion over 10 years, including $23 billion for the 'Golden Dome' missile defence system and $28 billion for shipbuilding. Homeland Security will be $129 billion better off, with $45 billion earmarked for the border wall, the same amount allocated to detention centres.

There is an agreement between the Senate and House Elephants on ending tax breaks for clean energy (wind, solar, CCUS, and batteries), though the pace of phase-out was a point of contention. Senate Republicans favoured a gradual rollback, while the House version of the bill demanded an immediate end to subsidies, even though numerous Republican districts have benefited from them. Senate Republicans were also advocating a September 30, 2025, phase-out of federal tax credits for electric vehicles, three months earlier than initially planned. Additionally, penalties for noncompliance with fuel standards are slated for elimination.

Proponents of the budget argue that it will lead to economic prosperity and claim that the budget deficit, which they (under)estimate to be at 3%, will be offset by revenues from import tariffs. Elements of the bill could, indeed, nudge the economy in the right direction, but it is likely to be neutralised by the adverse impact of trade wars. Additionally, optimistic official growth projections should render any immediate pressure on the Federal Reserve to cut interest rates moot, as such cuts would likely spark inflation. Still, criticism of Jay Powell’s perceived inertia remains perennial. Mediocre growth might not be able to counter the effects of the ballooning budget deficit, growing investors’ anxiety, and deepening inequality gap. As for nonrepetitive history, there are always exceptions to the rule, and a closer look at this Big Beautiful Bill suggests that next year’s midterm elections might just be one of them.

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