TrendForce

2025-01-23

Japan Exports Hit 45-Year High in 2024, Trade Deficit Narrows by 44%

Japan's exports in December reached 9.91 trillion yen, a year-over-year increase of 2.8% (prior: 3.8%), according to the Ministry of Finance of Japan, marking the third consecutive month of growth. For the full year, exports totaled 107.1 trillion yen, up 6.2% year-over-year (prior: -6.8%), hitting the highest level since 1979. Imports in December amounted to 9.77 trillion yen, rising 1.8% year-over-year (prior: -3.8%), with annual imports totaling 112.4 trillion yen, a 1.8% year-over-year increase (prior: -6.8%). The trade balance in December turned positive for the first time in six months, reaching a surplus of 130.9 billion yen (prior: -117.6 billion yen). For the full year, the trade deficit narrowed significantly by 44% to 5.3 trillion yen. The growth in December's exports was primarily driven by electrical and general machinery. Semiconductor and electronic components exports saw a year-over-year growth of 6.5% (prior: -2.3%). Semiconductor manufacturing equipment continued its growth trend but with a slightly reduced year-over-year growth rate of 10.6% (prior: 32.1%), indicating sustained global demand for semiconductors. In contrast, transportation equipment underperformed, with automobile exports—the largest contributor within the category—declining further to -5.9% year-over-year (prior: -5.2%), remaining a major drag on overall export performance. From a regional perspective, exports to China experienced a sharp decline of -3.0% year-over-year (prior: 7.1%), reflecting not only China's sluggish economy but also Japan's reduced semiconductor component exports to comply with U.S. chip restrictions, which saw a year-over-year decline of -10.4% (prior: 9.9%). Exports to the United States also decreased, with a year-over-year decline of -2.1% (prior: -8.0%), reflecting continued weak automotive sales and uncertainty surrounding tariff policies. Despite this, Japan's annual trade surplus with the United States reached approximately 8.6 trillion yen, the fifth-highest on record, raising concerns over potential U.S. trade surplus sanctions against Japan. The Bank of Japan (BOJ) is scheduled to hold its first monetary policy meeting of the year on January 24. Facing increased inflationary pressures from a weakened yen, ongoing corporate wage hikes, and U.S. President Trump's decision to delay tariff-related actions on his first day in office, the market widely anticipates the BOJ will raise interest rates by 25 bps to 0.5%. This expectation is further reinforced by BOJ Governor Kazuo Ueda's repeated comments that "rate hikes will be implemented if economic and price trends align with expectations." Read more at Datatrack

By TrendForce

2025-01-22

Trump's Executive Orders at a Glance: From Tariffs to Immigration

U.S. President Donald Trump officially took the oath of office on January 20 and immediately signed a series of executive orders and memoranda addressing a wide range of issues, including immigration, trade, energy, federal personnel, national security, and gender and cultural policies : Trade and Economy No New Tariffs on China, Potential Duties on Mexico and Canada President Trump announced no new tariffs on China but indicated that duties as high as 25% could be imposed on Mexico and Canada by February 1. He also suggested the possibility of implementing "universal tariffs" in the future. Establishment of an "External Revenue Service" Trump proposed creating a new agency to use tariff revenues to reduce domestic taxes, stating, "We will tax foreign goods, not the American people, for the benefit of the nation." Declaring an "Inflation Emergency" Federal agencies were directed to implement measures to expand housing supply, reduce healthcare costs, and create jobs while rolling back certain climate policies that have driven up energy and food costs. Withdrawal from the Global Minimum Corporate Tax Agreement Trump rejected the international minimum corporate tax agreement championed by the Biden administration, arguing it lacked formal congressional approval and was non-binding for the U.S. Immigration Policy Southern Border Emergency and Military Deployment Declared a national emergency, deploying armed forces (including the National Guard) to secure the southern border and resuming construction of the U.S.-Mexico border wall. Mass Deportations and Enhanced Enforcement Advocated for the deportation of "millions of illegal immigrants," granting broader enforcement powers to ICE and CBP. Suspension of Refugee Resettlement Paused the refugee resettlement program, ended the "catch and release" policy, and planned to reinstate the "Remain in Mexico" program. Drug Cartels and Gangs Designated as Foreign Terrorist Organizations Groups like MS-13 and Tren de Aragua, along with Mexican cartels, were labeled foreign terrorist organizations, with plans to invoke the 1798 Alien Enemies Act to expel their members. Termination of Birthright Citizenship Issued an executive order ending automatic citizenship for children born to undocumented immigrants or those on temporary visas (e.g., tourist, student, or work visas). Energy and Climate Withdrawal from the Paris Agreement and Expanded Oil and Gas Drilling Reaffirmed the U.S. withdrawal from the Paris Climate Agreement (formal withdrawal requires a year) and promoted offshore and Alaskan oil and gas development, pledging to "drill, baby, drill" and replenish the Strategic Petroleum Reserve (SPR). Ending Wind Energy Projects and EV Subsidies Ordered a halt to large-scale wind energy development and leasing, and terminated electric vehicle subsidies and related emissions exemptions. Gender and Cultural Policies Binary Gender Policy and DEI Program Termination Declared that federal policy recognizes only two genders: male and female. Agencies were instructed to reflect biological sex on official documents, passports, and visas. Additionally, all Diversity, Equity, and Inclusion (DEI) programs within federal agencies were terminated. Federal Government Creation of a Department of Government Efficiency Announced a new "Department of Government Efficiency" led by Elon Musk, with all federal agencies required to establish task forces to streamline processes and cut costs. Mandatory Return to Office and Hiring Freeze Ordered all federal employees to return to in-office work immediately and imposed a 90-day hiring freeze for federal civilian positions, excluding military, immigration, and national security roles. Withdrawal from the World Health Organization (WHO) Ordered the U.S. withdrawal from the WHO and halted funding, though formal exit requires a one-year notice and payment of outstanding dues. Regulation Freeze Directed all federal departments to halt drafting or issuing new regulations pending review by the administration or approval by appointed officials. Other Mass Pardons for January 6 Capitol Riot Defendants Issued broad pardons for individuals involved in the January 6, 2021, Capitol riot, with 14 receiving sentence reductions. TikTok Ban Delayed for 75 Days Directed the Attorney General to delay enforcement of the TikTok ban by 75 days to ensure an orderly resolution while balancing national security concerns with the app's widespread use. Restoration of the Death Penalty Ordered the death penalty to be sought in cases involving the murder of law enforcement officers or violent crimes by undocumented immigrants, citing the need to protect Americans from violence. -- (Photo Credit: Donald J. Trump)

By TrendForce

2025-01-21

Which President led the best U.S. economy? Clinton to Biden

The transition of power between U.S. presidents has always been a major focus on the political stage and a critical barometer for global financial markets. As Donald Trump returns to the White House on January 20, market reactions to potential policy directions have already been significant. In anticipation of his inauguration, the S&P 500 surged to 6,000, 10-year U.S. Treasury yields climbed to 4.6%, and the Dollar Index approached the 110 mark. These market movements reflect both the uncertainty surrounding new policies and the profound impact Trump’s stance on major domestic and international issues may have. Looking back at the terms of recent U.S. presidents, from economic reforms and geopolitical conflicts to global crises, their strategies have deeply influenced investor confidence and financial market trends worldwide. Below is an overview of the key policies and market performances under recent presidents, along with their broader economic and financial implications: Bill Clinton: From Deficit Reversal to the Prosperous Era of the Internet Frenzy n the early years of his presidency, Bill Clinton enacted the North American Free Trade Agreement (NAFTA) in 1994, creating the largest free trade zone in the world, encompassing the U.S., Canada, and Mexico. On the fiscal front, Clinton faced a $200 billion deficit left by former President George H. W. Bush and implemented measures to cut government spending and raise taxes, transforming the deficit into a surplus. Clinton’s tenure was marked by a booming internet technology sector, driving economic prosperity. By the end of his term, the U.S. economy had grown for 112 consecutive months, unemployment had dropped from a peak of 7.8% to 3.9%, and inflation was maintained between 2–3%. The stock market also surged, with the tech-heavy NASDAQ soaring from around 400 points at the beginning of his term to over 5,000 points. Read more at Datatrack However, Clinton’s presidency was not without challenges. From 1995 to 1996, disputes between Democrats and Republicans over budget planning led to a 21-day government shutdown, the longest in U.S. history at the time. Scandals such as the "Monica Lewinsky affair" almost resulted in his impeachment by the House of Representatives. Additionally, the frenzied development of the internet sector set the stage for the subsequent "dot-com bubble," which began bursting in early 2000, causing the NASDAQ to nearly halve to around 2,700 points by the end of his presidency. Read more at Datatrack George W. Bush: A Turbulent Era of the War on Terror and the Global Financial Crisis Bush’s early presidency faced significant challenges, including the 2001 "dot-com bubble burst" and the 9/11 terrorist attacks. To combat economic recession and rising unemployment, Bush introduced tax cuts totaling $1.35 trillion in 2001 and $350 billion in 2003. Combined with the Federal Reserve’s 11 consecutive rate cuts, these measures facilitated economic recovery, with the S&P 500 rebounding to approximately 1,500 points. However, the recovery was short-lived. The Federal Reserve raised rates from 2004 to 2006 to curb inflationary pressures, tightening the once-lax housing market conditions. Subprime mortgage issues surfaced in 2007, culminating in a global financial crisis by 2008. Major financial institutions collapsed or faced liquidity crises. Despite the Fed’s swift return to rate cuts and the introduction of unlimited quantitative easing (QE), market panic persisted, with the S&P 500 plunging below 800 points. Although the Bush administration collaborated with Congress to implement financial rescue measures such as the TARP (Troubled Asset Relief Program), the U.S. economy remained in deep recession. Read more at Datatrack Barack Obama: The Road to Recovery from the Subprime Crisis and Financial Reform Obama assumed office during the aftermath of the subprime crisis, with a struggling economy and high unemployment. In February 2009, he enacted the $787 billion "American Recovery and Reinvestment Act," which included $286 billion in tax cuts and over $500 billion in government spending to stimulate growth. To prevent future crises, the Obama administration also introduced the "Dodd-Frank Act" in July 2010, strengthening safeguards against systemic risks in the financial sector. Under Obama, the U.S. economy gradually recovered, supported by prolonged low interest rates, QE2, QE3, and fiscal policies. Unemployment fell from a peak of around 10% to 4–5%, while inflation remained controlled. The S&P 500 rebounded from a low of 700 points in early 2009 and reached new highs after 2013. In December 2015, the Fed initiated its first rate hike in nearly a decade, ending a seven-year era of zero interest rates. Read more at Datatrack By the end of Obama’s term, the S&P 500 surpassed 2,200 points, marking a prolonged bull market. Read more at Datatrack Donald Trump: Market Maneuvers Amid Tax Cuts, Trade Wars, and the Pandemic In late 2017, Trump enacted the "Tax Cuts and Jobs Act" (TCJA), the largest tax reform since 1986, lowering corporate tax rates from 35% to 21% and reducing individual tax burdens to spur growth. Meanwhile, Trump’s "America First" policy led to tariffs on major trading partners like China and the EU and renegotiation of NAFTA, culminating in the USMCA (United States-Mexico-Canada Agreement). Despite ongoing U.S.-China trade tensions, the economy grew at a steady 2–3%, with inflation and unemployment remaining stable. The S&P 500 rose to over 3,200 points by 2019. Read more at Datatrack However, the COVID-19 pandemic in early 2020 triggered a global economic crisis, pushing unemployment from 3.5% to 14.8%. Massive fiscal measures, such as the CARES Act, and the Fed’s rapid return to zero interest rates helped markets recover. By the end of Trump’s term, the S&P 500 had climbed back to around 3,700 points Read more at Datatrack Joe Biden: A New Chapter of Governance in Post-Pandemic Recovery and Inflation Challenges Biden’s presidency began during the post-pandemic recovery, with vaccines becoming widely available but economic and public health challenges persisting. His "American Rescue Plan" provided direct payments, unemployment benefits, and business loans to accelerate recovery. Biden also advanced the "Infrastructure Investment and Jobs Act" to modernize infrastructure and create jobs. However, with market demand rebounding, supply chain bottlenecks, and rising global raw material prices, inflation surged significantly in the second half of 2021. To curb overheating inflation, the Federal Reserve began tapering bond purchases at the end of 2021 and initiated quantitative tightening (QT) and a rate hike cycle in 2022. The Biden administration also signed the Inflation Reduction Act to ease inflationary pressures. As a result, concerns over stagflation and economic recession intensified, leading the S&P 500 Index to retreat to around 3,700 points. Against the backdrop of the Fed continuing to raise interest rates to restrictive levels and implementing QT, core inflation gradually fell from its 2022 peak of 6% to over 4% in 2023, with supply-demand imbalances also improving. Despite the restrictive rate environment suppressing market demand, the wealth effect created during the pandemic kept U.S. consumer spending strong, further boosting confidence in a "soft landing" for the U.S. economy. At the same time, the explosion of generative artificial intelligence (AI) in 2023 propelled the S&P 500 Index back above 4,700 points, its pre-rate hike level. Read more at Datatrack Entering 2024, market and labor demand gradually slowed under the influence of restrictive interest rates, but optimism around a "soft landing" persisted. The S&P 500 Index continued to rise to around 5,600 points, driven by the strong performance of AI-related stocks. Although mid-year labor market data cooled, shifting market sentiment toward pessimism, the Federal Reserve initiated rate cuts in September. However, economic data in the following months showed that the labor market remained healthy and consumer spending resilient, leading to renewed optimism in the market. By the end of the year, the S&P 500 Index had surged past the 6,000-point mark. Read more at Datatrack Since the 1990s, U.S. presidents have shaped global financial markets through economic policy, fiscal measures, trade strategies, and monetary policy decisions. From Clinton’s internet boom and free trade to Bush’s response to the dot-com bust and 9/11, Obama’s recovery from the subprime crisis, Trump’s tax cuts and protectionism, and Biden’s post-pandemic initiatives, each administration’s policies have significantly influenced the trajectories of stocks, bonds, and currencies. For investors and the global economy, understanding the dynamic relationship between U.S. presidential policies and financial markets remains an essential and ongoing task.

By TrendForce

2025-01-20

Key Focus This Week: Japan CPI & Rate Decision

U.S. core inflation came in lower than expected last week, easing concerns about a resurgence in inflation and increasing expectations for rate cuts. Optimism lifted all sectors of U.S. equities, with the S&P 500 Index rising 2.91% to close at 5,996.65. In the bond market, the prospect of looser monetary policy drove the 10-year Treasury yield down by 16 basis points to around 4.6%, while the U.S. Dollar Index fluctuated and edged down to approximately 109.4. Key Economic Data from Last Week U.S. December CPI: The U.S. Consumer Price Index (CPI) rose 2.9% year-over-year in December (previous: 2.7%) and 0.4% month-over-month (previous: 0.3%), according to market expectations. Core CPI increased by 3.2% year-over-year (previous: 3.3%) and 0.2% month-over-month (previous: 0.3%), both below market forecasts. The rise in CPI was primarily driven by a significant increase in energy prices, which surged 2.6% month-over-month (previous: 0.2%), contributing to over 40% of the monthly CPI increase. However, the lack of sustained growth in core goods prices from the previous month offset part of the inflationary impact. Core services prices remained stable at 0.2% month-over-month, with housing-related categories, including rent and owners’ equivalent rent, slightly increasing to 0.3% (previous: 0.2%). On a year-over-year basis, housing-related inflation continued its gradual decline, with rent and owners’ equivalent rent easing to 4.3% (previous: 4.4%) and 4.8% (previous: 4.9%), respectively. This reflects the ongoing softening in new lease agreements, and overall inflation is expected to moderate further as housing costs decline, albeit at a slow pace. Read more at Datatrack U.S. December Retail Sales: Retail sales grew 3.8% year-over-year (previous: 4.1%) and 0.4% month-over-month (previous: 0.8%) in December, slightly below the market expectation of 0.6%. Among key categories, automotive sales grew strongly by 8.4% year-over-year (previous: 7.4%) and furniture/home goods sales surged by 8.4% (previous: 2.8%). These gains were partially offset by declining sales in building materials, which fell by -1.8% year-over-year (previous: 2.1%). Excluding autos and gasoline, core retail sales grew 3.3% year-over-year (previous: 4.1%) and 0.3% month-over-month (previous: 0.2%). Further excluding food services and building materials, control group retail sales increased 4.1% year-over-year (previous: 4.6%) and 0.7% month-over-month (previous: 0.4%), indicating that overall consumer spending remains resilient. Read more at Datatrack China December Economic Data: Industrial production grew significantly by 6.2% year-over-year (previous: 5.4%), supported by industrial equipment upgrades and policies incentivizing the replacement of consumer goods. Retail sales grew 3.7% year-over-year (previous: 3.0%), driven by strong demand for household appliances under replacement subsidy programs. Fixed asset investment weakened slightly to 3.2% year-over-year (previous: 3.3%) amid continued weak local government finances. Fourth-quarter GDP grew 5.4% year-over-year (previous: 4.6%) due to robust production and accelerated exports, bringing full-year 2024 GDP growth to 5.0% (2023: 5.2%). Read more at Datatrack Key Economic Data from Last Week Japan CPI (1/24)：With energy subsidies being phased out since November, inflationary pressures in Japan are rising. Market expectations for core CPI (excluding food) indicate a year-over-year increase of 3.0% (previous: 2.7%). Read more at Datatrack Japan Rate Decision (1/24): The Bank of Japan (BoJ) maintained its policy rate at 0.25% during its December meeting. BoJ Governor Kazuo Ueda indicated that further rate hikes would depend on more data on domestic wage growth and the economic policies of the incoming U.S. President, Donald Trump. However, Ueda has reiterated that rate hikes will continue if economic and inflationary trends meet expectations. The BoJ’s latest quarterly report noted that an increasing number of companies now consider wage hikes a standard practice. Markets anticipate that if Trump refrains from introducing policies with significant economic impacts, the BoJ is likely to raise rates again in January. Read more at Datatrack

By TrendForce

2025-01-17

U.S. Retail Sales Misses Expectations in December, Q4 GDP Supported by Labor Market Strength

The latest U.S. retail sales data for December showed resilience despite facing challenges from high interest rates and inflationary pressures. Boosted by the holiday shopping season, most product categories maintained growth. However, the growth rate slightly missed market expectations, indicating that some consumers remained cautious amid the economic environment. The retail sales increased by 3.8% year-over-year (previous: 4.1%) and 0.4% month-over-month (previous: 0.8%)in December, according U.S. Census Bureau on January 17, slightly below the market expectation of 0.6%. Breaking down the details, 10 out of 13 major retail categories recorded growth. Automotive-related sales were particularly strong, growing 8.4% year-over-year (prior: 7.4%) and 0.7% month-over-month (prior: 3.1%). This reflects continued uncertainty over Trump’s tariff policies and concerns about the end of EV subsidies, keeping auto sales elevated. Furniture sales also grew significantly, with an 8.4% year-over-year increase (prior: 2.8%) and a 2.3% month-over-month rise (prior: 1.3%), potentially reflecting demand for home rebuilding following hurricanes in October. Meanwhile, online sales continued to grow at a solid pace due to the delayed Cyber Monday this year, rising 6.0% year-over-year (prior: 9.8%) and 0.2% month-over-month (prior: 1.7%). However, Food services & drinking places, which reflect household financial conditions, declined again, with a 2.4% year-over-year increase (prior: 3.1%) and a -0.3% month-over-month change (prior: 0.1%). Sales of building materials also fell, impacted by 30-year mortgage rates returning to 7%, with a -1.8% year-over-year decline (prior: 2.1%) and a -2.0% month-over-month decline (prior: -0.8%). Excluding auto and gasoline sales, core retail sales grew 3.3% year-over-year (prior: 4.1%) and 0.3% month-over-month (prior: 0.2%). Further excluding food services and building materials, control group retail sales increased by 4.1% year-over-year (prior: 4.6%) and 0.7% month-over-month (prior: 0.4%). Read more at Datatrack Overall, most retail categories saw moderate growth in December. While elevated interest rates and price levels continued to pressure lower-income groups and housing-related sales, the U.S. holiday shopping season ended on a relatively strong note, reaffirming the resilience of U.S. consumer spending. Separate Data on January 17 shows that latest jobless claims data slight increase in initial jobless claims to 217,000 (prior: 203,000), while the four-week moving average dropped to 212,750 (prior: 213,000), the lowest level since April of last year. Meanwhile, continuing claims fell to 1,859,000 (prior: 1,877,000). Read more at Datatrack Combined with December’s nonfarm payrolls far exceeding market expectations and the JOLTs layoff rate remaining at historic lows, the U.S. labor market remains robust. With a healthy labor market and resilient consumer spending, the Federal Reserve Bank of Atlanta estimates Q4 GDP to grow at an annualized rate of 3.0%, slightly lower by 0.1 percentage points compared to Q3.

By TrendForce

2025-01-16

U.S. December Core CPI Declines, Market Anticipates Earlier Rate Cuts

The U.S. December Consumer Price Index (CPI) report showed core inflation falling below market expectations, alleviating fears of a resurgence in inflation. While markets still expect rates to remain unchanged in January, expectations for rate cuts this year have shifted earlier to June. Following the data release, the three major U.S. stock indices rallied, and the 10-year Treasury yield fell to approximately 4.6%. The CPI increased by 2.9% year-over-year (prior: 2.7%) in December, according to Bureau of Labor Statistics (BLS)on January 15, marking the third consecutive monthly increase. Month-over-month rise a 0.4% (prior: 0.3%), both in line with market expectations. Core CPI rose 3.2% year-over-year (prior: 3.3%) and 0.2% month-over-month (prior 0.3%), both below market expectations of 3.3% and 0.3%, respectively. Read more at Datatrack Breaking down the component, the rise in CPI was primarily driven by a sharp increase in energy prices, which rose 2.6% month-over-month (previous 0.2%). However, core goods prices increased by just 0.1% month-over-month (previous 0.3%), failing to sustain the upward momentum from the previous month, offsetting some of the gains from energy prices. Core services prices rose 0.2% month-over-month (unchanged from the previous month), with housing services—the largest component—rising 0.3% month-over-month (unchanged from the previous month). Rent and owners’ equivalent rent also rose to 0.3% month-over-month (previous 0.2%). (Source: BLS) On a year-over-year basis, housing services inflation fell to 4.6% (previous 4.7%), the lowest since January 2022. Rent and owners’ equivalent rent continued to decline, falling to 4.3% (previous 4.4%) and 4.8% (previous 4.9%), respectively. These trends suggest that overall core inflation will continue to decline as new lease rates moderate, though the process is expected to remain gradual. During the Federal Reserve’s December FOMC meeting and economic forecast release, officials raised their inflation forecasts for 2024-2026, reflecting uncertainty surrounding Trump-era tariffs and immigration policies. This move aimed to preemptively anchor market expectations for a higher inflation trajectory. The January University of Michigan Consumer Sentiment Survey showed that one-year inflation expectations rose to 3.3% (previous 2.8%), while long-term inflation expectations also increased to 3.3% (previous 3.0%). This forward-guidance strategy contributed to a more positive market reaction when core CPI and the Producer Price Index (PPI), released on January 14, came in below expectations. According to CME FedWatch data, markets maintained expectations for no rate changes in January and a single rate cut this year. However, the timing of the first rate cut has shifted slightly earlier to June (previously July), with a 30% probability of two rate cuts by year-end. Following the data release, U.S. stock indices gained between 1.5% and 2.5%, while the 10-year Treasury yield eased to around 4.6% on expectations of looser monetary policy. Core inflation is expected to decline in the first quarter of 2025 due to high base effects and the dissipation of seasonal factors. The trajectory of core inflation in the second quarter will be critical. If core inflation continues to decline in Q2, it could deliver further positive surprises to the market and bolster expectations for an earlier Fed rate cut.

By TrendForce

2025-01-15

U.S. Debt Ceiling Returns: Renewed Fears of Shutdown and Liquidity?

With the U.S. Debt Ceiling Reinstated on January 2, 2025, Market Concerns Over Raising or Suspending the Debt Ceiling to Avoid Default Have Intensified. On December 27, Treasury Secretary Janet Yellen sent a letter to Congress warning that the debt ceiling could be reached between January 14 and January 23. If this happens, the Treasury may need to implement “extraordinary measures” and utilize the Treasury General Account (TGA) cash balance to prevent a technical default and another government shutdown. Notably, the Federal Reserve highlighted in its meeting minutes that the reinstatement of the debt ceiling would complicate the assessment of market liquidity and the impact of quantitative tightening (QT) due to the dynamic interaction between TGA balances, overnight reverse repurchase agreements (ON RRP), and bank reserves. In the short term, the U.S. Treasury is expected to mitigate default risks using the TGA account, temporarily alleviating market liquidity pressures. However, once the X-date is reached and large-scale debt issuance resumes, market liquidity will inevitably tighten. If the Federal Reserve has not concluded QT by the X-date, significant liquidity risks may arise. What is U.S. Debt Ceiling? The U.S. debt ceiling, determined by Congress, sets a statutory limit on the federal government’s borrowing to control debt growth. Established in 1917 to manage wartime fiscal spending, it has since been adjusted or suspended whenever the government needs additional borrowing capacity. However, prolonged legislative procedures often delay debt ceiling adjustments, risking a default and government shutdown. To avert this, the Treasury typically employs “extraordinary measures,” using TGA balances to cover government expenditures. Once these funds are exhausted, the government reaches the “X-date,” facing a technical default and a potential shutdown, causing broader market disruptions. Historically, the likelihood of a U.S. technical default has been low. The debt ceiling often serves more as a political bargaining tool between parties than an actual fiscal constraint. For instance, in January 2023, when the debt ceiling was reached, the Treasury deployed extraordinary measures until June, when Congress passed the “Fiscal Responsibility Act” to suspend the borrowing limit. This scenario mirrored the 2017 debt ceiling episode when the Republican-controlled Congress faced a similar situation. Interaction Between the Debt Ceiling, the Federal Reserve’s Liabilities, and QT The debt ceiling’s reinstatement directly impacts the Federal Reserve’s balance sheet, a focal point for investors and policymakers given the Fed’s dual role as a major holder of U.S. Treasuries and executor of monetary policy. The Fed’s balance sheet liabilities can be broadly categorized into three components: Bank Reserves: Funds held by financial institutions in their Fed accounts. Treasury General Account (TGA): The primary account for U.S. government transactions held at the Fed. Overnight Reverse Repurchase Agreements (ON RRP): A monetary policy tool allowing the Fed to sell securities to counterparties and repurchase them later at a higher price. Read more at Datatrack When the debt ceiling is reinstated and remains unchanged, Treasury issuance is constrained. Consequently, excess government spending must be covered through the TGA account, injecting liquidity into the private and banking sectors. This increases bank reserves and could drive funds into ON RRP as investors seek alternatives amid reduced Treasury issuance. Simultaneously, the Fed’s QT program—allowing bonds to mature without reinvestment—reduces market liquidity as primary dealers, banks, and money market funds absorb new Treasury issuances. This combination of QT and the debt ceiling introduces complex liquidity dynamics: while QT tightens liquidity by withdrawing market funds, TGA spending injects liquidity. These opposing forces obscure the true extent of liquidity tightening, complicating the Fed’s assessment of financial conditions. The Fed’s November meeting minutes emphasized that the debt ceiling’s reinstatement would amplify the challenges of evaluating market liquidity dynamics. Practical Impacts of the Debt Ceiling Reinstatement As of now, the TGA cash balance stands at approximately $652.6 billion. If extraordinary measures are activated in the coming weeks, market consensus suggests the X-date will occur in mid-2025. During the initial phase of extraordinary measures, TGA cash outflows will temporarily ease liquidity constraints, reflected primarily in reduced ON RRP balances as Treasury issuance slows. Bank reserves are expected to remain stable at around $3.2 trillion. After the X-date, the Treasury will need to issue significant amounts of debt to replenish TGA balances, reducing bank reserves and ON RRP balances, thereby tightening overall liquidity. If the Fed has not ended QT by this point, liquidity conditions could worsen, heightening systemic risks and the likelihood of market disruptions. This aligns with December meeting minutes showing market expectations for QT to conclude by Q2 2025. Although the Treasury’s use of extraordinary measures and TGA funds may temporarily alleviate liquidity pressures, the significant debt issuance required after the X-date will inevitably draw funds away from the banking system and money market funds, placing downward pressure on bank reserves and ON RRP balances. If the Fed continues QT during this period, the market will face even greater liquidity risks.

By TrendForce

2025-01-13

Key Focus This Week: U.S. CPI & China GDP

Stronger-than-expected U.S. employment data last week prompted markets to scale back expectations for Federal Reserve rate cuts, placing pressure on rate-sensitive financial and technology stocks. This weighed on the S&P 500, which declined 1.54% to close at 5,827.03. In the bond market, robust employment data pushed the 10-year U.S. Treasury yield up by 16 basis points to approximately 4.76%. Meanwhile, the U.S. Dollar Index jumped to around 109.6, edging closer to the 110 threshold. Key Economic Data for Last Week U.S. ISM Services PMI: The ISM Services PMI for December came in at 54.0 (prior: 52.1), marking six consecutive months of expansion. Sub-indices showed improvement, with the business activity index rising to 58.2 (prior: 53.7) and the new orders index increasing to 54.2 (prior: 53.7), reflecting resilient demand and early release of orders driven by uncertainty over Trump’s tariff policies. The employment index dipped slightly to 51.4 (prior: 51.5) but remained in expansion territory, indicating continued strength in the services labor market. However, robust demand pushed both input and sales prices higher, with the price index surging to 64.4 (prior: 58.2), suggesting that service sector inflation may take longer to ease. Read more at Datatrack U.S. Employment Situation: The December U.S. employment report significantly exceeded market expectations. Nonfarm payrolls rose by 256,000 (prior: 212,000), driven by employment gains in services sectors such as education and healthcare (+80,000), retail trade (+43,400), and leisure and hospitality (+43,000). Manufacturing, however, continued to decline, with a loss of 13,000 jobs. Household survey data showed a 478,000 increase in employed persons and a 235,000 decline in unemployed persons, pushing the unemployment rate down to 4.1% (prior: 4.2%). The labor force participation rate remained stable at 62.5%, and the share of unemployed workers who lost their jobs held steady at 47.2% (prior: 47.7%), highlighting the continued robustness of the labor market. Read more at Datatrack U.S. Fed December FOMC Meeting Minutes: The minutes shows that officials expect the labor market to remain strong. However, they indicated that potential changes in trade and immigration policies could heighten inflationary risks and delay the timeline for inflation to return to target. This outlook underscores the need for a more cautious approach to future monetary policy adjustments. Key Economic Data for This Week U.S. December CPI (1/15): Supported by low base effects in Q4 and rising ISM services price indices in December, the Federal Reserve Bank of Cleveland forecasts U.S. December CPI to rise 2.86% year-on-year (previous 2.75%), with core CPI expected to grow 3.28% year-on-year (previous 3.32%). Read more at Datatrack U.S. December Retail Sales (1/16): Driven by the traditional Q4 holiday shopping season and early demand release for durable goods, such as automobiles, due to uncertainty over Trump’s tariff policies, retail sales are expected to grow 3.7% year-on-year (previous 3.8%) and 0.6% month-on-month (previous 0.7%). Read more at Datatrack China December Monthly Data (1/17): With the continuation of industrial equipment upgrade policies and consumer goods trade-in incentives, markets expect industrial output to grow by 5.4% year-on-year in December. Retail sales are forecast to increase by 3.5% year-on-year (previous 3.0%), supported by subsidies for automobiles and home appliances. Fixed-asset investment is expected to grow by 3.3% year-on-year amid weak local government fiscal. Meanwhile, Q4 GDP is projected to accelerate to 5.0% year-on-year (Q3: 4.6%), driven by stimulus policies and front-loaded exports due to Trump’s tariff measures, with full-year 2024 GDP expected to grow by 4.8% (2023: 5.2%). Read more at Datatrack

By TrendForce

2025-01-10

Japan’s Real Households Spending Declines for Four Consecutive Months, Highlighting BOJ’s Rate Hike Dilemma

Japan November Real average household consumption for two-or-more-person households decreased by 0.4% year-on-year (previous -1.3%), marking the fourth consecutive monthly decline, according to Japan’s Ministry of Internal Affairs and Communications on January 10. The Bank of Japan (BOJ) officially ended its negative interest rate policy in March last year, citing the emergence of a virtuous cycle between wage growth and price increases. However, amid a weakening yen and rising inflation driven by the removal of energy subsidies, consumers are still compressing their spending under cost pressures, preventing a significant recovery in consumption expenditure. While November wage data showed nominal wages rising by 3.0% year-on-year, up 0.8 percentage points from the previous month and marking the largest increase in over 30 years, inflation continued to outpace wage growth. Real wages declined by 0.3% year-on-year (previous -0.4%), also marking the fourth consecutive monthly decrease. Bank of Japan (BOJ) Governor Kazuo Ueda stated at the December post-meeting press conference that the timing of the next rate hike would depend on the results of the preliminary shunto wage negotiations in March-April and changes in U.S. economic policies. This statement was interpreted by markets as an indication that the BOJ is likely to delay its next rate hike until March. However, the BOJ’s quarterly report released on January 9 highlighted that labor shortages and minimum wage increases are progressively spreading the importance of wage growth across businesses of all sizes and industries. This suggests that the BOJ may already see sustained wage growth potential ahead of March. Overall, The BOJ faces a difficult choice: raising rates earlier could help temper inflation and guide it toward moderate growth, but with wage increases still uncertain, it risks further pressuring already weak consumption. On the other hand, delaying rate hikes could allow inflation to rise further, eroding consumers’ wage gains and real purchasing power. These conflicting factors create significant uncertainty over whether the BOJ will opt for a rate hike in January or March. Read more at Datatrack

By TrendForce