The Defiant US Economy with Marta Norton

Marta Norton, Chief Investment Strategist at Empower, discusses the US economy and whether a new tax package could be a long-term positive for markets. Traders are betting that long-term Treasury yields will surge due to concerns over the US government's debt and deficits, fueled by President Donald Trump's tax-cut bill. Marta speaks with Bloomberg's Tom Keene and Paul Sweeney.

Wall Street kept a close eye on the budget wrangling in Washington, with stocks, bonds and the dollar falling on concern over whether the US will be able to rein in its ballooning deficit that threatens America’s status as the world’s safe haven.

Following a surge from its April lows, the S&P 500 dropped for a second straight day. Risk-on sentiment was also hurt by a news report that Israel would be preparing to potentially strike Iran, which sent oil higher, despite the lack of clarity on whether a decision had been made. Equities briefly trimmed losses after Bloomberg News reported the European Union was expected to share a revised trade proposal with the US.

Traders continued to pile into bets that long-term yields will keep climbing, with the rate on 30-year bonds topping 5%. Those wagers echoed sentiment on Wall Street where strategists from Goldman Sachs Group Inc. to JPMorgan Chase & Co. are lifting their forecasts for yields. An auction of 20-year Treasuries will shed light on demand.

House Speaker Mike Johnson said Republicans have reached an agreement to increase the state and local tax deduction to $40,000, suggesting a resolution to one of the final issues holding up President Donald Trump’s economic bill. Still, the accord is causing a backlash from conservatives who are pushing for more spending cuts to offset the tax reductions in the package.

Concerns about rising US debt and budget deficits were reinforced Friday, when Moody’s Ratings lowered the nation’s credit score below the top triple-A level. For many, the message was: Unless America gets its finances in order, the perceived risks of lending to the government will rise. That would make reducing the deficit harder and lift the cost of money for households and companies.

Former US Treasury Secretary Steven Mnuchin said he’s more alarmed by the country’s growing budget deficit than its trade imbalances, and urged Washington to prioritize fiscal repair.

“I’m very concerned,” he said during a panel discussion at the Qatar Economic Forum on Wednesday. “The budget deficit is a larger concern to me than the trade deficit. So I’m on the side of, I hope we do get more spending cuts — something that’s very important.”

The S&P 500 fell 0.5%. The Nasdaq 100 lost 0.2%. The Dow Jones Industrial Average slipped 0.9%.

The yield on 10-year Treasuries rose four basis points to 4.53%. A dollar gauge slid 0.4%. The South Korean won jumped as local media reported the direction of the currency was discussed at ongoing trade talks with the US.

“US fiscal matters have dominated again over the last 24 hours, as investors continue to grapple with what the long-term unsustainable nature of US debt means in the near term,” said Deutsche Bank strategists including Jim Reid.

The House Rules Committee debated Trump’s bill for hours early Wednesday, beginning at 1 a.m. Washington time, in order to meet Johnson’s self-imposed Thursday deadline to pass the legislation out of the House. Republicans are expected to soon release a revised version of the legislation that will address SALT and other unresolved issues.

“The budget is like a bad news, good news, bad news joke,” said Chris Low at FHN Financial. “The first bad news, it has been out of control for years — which is why Moody’s downgraded US debt. The good news, the current budget is tracking to stabilize the deficit, and could even reduce it. The second bad news, the budget needs to shrink, not stabilize.”

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