Recent economic data from the United States presents a mixed picture for investors. Revised labour force statistics indicate a weaker jobs market in the past year, with an average of only 15,000 jobs added monthly, significantly lower than the initially reported 45,000. However, January employment figures surged, with the US economy adding 130,000 jobs, exceeding economists’ expectations. This prompted money markets to adjust their outlook on US rate cuts, now anticipating only two instead of the previously expected two or three. Consequently, the two-year US Treasury yield increased, along with a slight rise in the 10-year Treasury yield to 4.17 per cent.
Despite concerns about fiscal policy and Federal Reserve independence, bond yields have remained stable since last April, largely due to tariff revenues acting as a consumption tax. However, America’s national debt is projected to escalate from $US32.1 trillion this year to $US56.2 trillion by 2036, potentially reaching 120 per cent of GDP, surpassing levels seen during World War II.
The escalating debt carries a significant cost, with interest payments consuming an increasing portion of government revenue. Currently, the US government spends $US1 of every $US5 in revenue on interest payments, a figure projected to rise to $US1 in $US4 by 2035 and $US1 in $US3 by 2050. This situation could be exacerbated if the Supreme Court rules against the legality of current tariffs.
A potential reversal of tariffs could trigger bond market jitters, leading to a spike in the 10-year Treasury yield and impacting equity markets already sensitive to factors like AI spending and the crypto sell-off. Investors may find themselves in the unusual position of hoping the Supreme Court upholds tariffs to avoid further economic instability.
