US: Trade Imbalances And Capital Flow Tools(Part1)
Michael McNair wrote a recent article US Trade Imbalances on substack and posted a few comments relating to that on X : https://t.co/9tcmEuIJ75. McNair weighs in on potential next steps from the Trump Administration, potentially around capital flows. https://x.com/michaeljmcnair/status/1922350455859888315
- “In my recent @commonplc article, I argue that the next phase of the Trump administration’s trade strategy will focus on capital flow tools. Tariffs address national security, but capital flow measures target the forces that actually drive persistent US trade imbalances.”
- “Most discussions of trade focus only on goods and services. But the balance of payments has two sides: the trade account and the capital account. Every trade deficit is matched, dollar for dollar, by a capital account surplus.”
- “All dollars spent abroad must eventually return to the US to either buy a) US goods and services or b) US financial assets. For too long, those dollars have come back primarily to purchase financial assets.”
- “Capital flow tools, like a foreign withholding tax on interest income, tip the balance. They make US goods and services relatively more attractive than US financial assets - redirecting foreign demand away from Wall Street and back toward Main Street.”
- “Yet, despite 40yrs of persistent US trade deficits, the dollar has appreciated 350% - defying the purpose of flexible exchange rates. Persistent imbalances are the smoking gun proof that the system is broken; thus, the administration is justified for wanting to redesign it.”
- “Inelastic demand for US financial assets has kept the dollar from depreciating and rebalancing trade. Far from trying to manipulate currency, the administration simply wants exchange rates to fulfill their intended role: correcting structural imbalances.”
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NEW ZEALAND: Westpac Nudges Up Q1 Inflation Forecast, But In Line With RBNZ
The local bank has nudged up its Q1 inflation forecasts after this morning's food price data. Q1 data prints this Thursday.
Westpac: "With continued strength in food prices, we’ve nudged our forecast for March quarter CPI up to 0.8% (up from 0.7% previously). That was mainly due to today’s stronger than expected food prices data.
That revision leaves our updated forecast in line with the RBNZ’s February MPS forecast. We also have the same forecasts for non-tradables (+0.9%) and tradable inflation (+0.7%).
The annual inflation rate is set to rise to 2.4%, up from 2.2% at the end of last year, but still comfortably within the RBNZ’s target band. Core inflation is also expected to remain well contained."
JGBS AUCTION: Poll: 20-Year JGB Auction
*JAPAN 20Y GOVT BOND AUCTION MAY HAVE 100.40 LOWEST PRICE:POLL– BLOOMBERG
JGBS: Cash Bonds Cheaper Ahead Of 20Y Supply
In Tokyo morning trade, JGB futures weakened, -40 compared to settlement levels.
- Today, the local calendar will be empty apart from 20-year supply.
- Cash US tsys are 1-3bps richer, with a flattening bias, in today's Asia-Pac session after yesterday’s solid gains.
- After the market close, Bostic spoke: "Right now range of possible outcomes has multiplied. Inflation is still much higher than target. Not in a position to boldly move in any direction, need more clarity." (via RTRS/BBG)
- “The Bank of Japan will probably leave aside raising interest rates for now due to uncertainties stemming from US tariff measures that could deal a blow to Japan’s economy, according to a former executive director, Kenzo Yamamoto. The BoJ wants to see how US-Japan trade talks proceed before making a move, and the current environment is not suitable for promoting further yen appreciation with monetary policy.” (per BBG)
- Cash JGBs are flat to 3bps cheaper across benchmarks, with the futures-linked 7-year leading the sell-off. The benchmark 20-year yield is 0.5bp lower at 2.427% ahead of today’s supply.
- Swaps have twist-flattened, with rates 3bps higher to 8bps lower. Swap spreads are mixed.
