US Senate leaders announced a bipartisan two-year spending bill yesterday, which increases spending caps both for defence and non-defence spending adding approximately USD150bn to the government deficit in both 2018 and 2019 (the same as the annual cost of tax reform), so deficit may exceed USD1,000bn next year although the output gap is more or less closed, explains Senior Analyst, Mikael Olai Milhøj at Danske Bank.

Key Quotes

“The deal includes a suspension of the debt limit until March 2019, meaning Treasury can start rebuilding its cash buffer again, which will drain USD liquidity if passed. While House Speaker Paul Ryan and President Trump support the bill, it is opposed by the Republican fiscal hawks in the House and the House Democratic leader Nancy Pelosi, who will not support a spending bill due to the ongoing discussion about immigration reform. The short-term funding bill expires today and risk is a government shutdown tomorrow if the bill is voted down.”