The Global Week Ahead: The Super Bowl of Budgets

Next Week's Risk Dashboard

• Trump plans US reciprocal tariffs to start the week
• Tracking the numbers behind US Budget talks…
• …and why they may thwart further easing by the Federal Reserve
• The unfavourable outlook for US debt and deficits
• Powell to deliver two rounds of Congressional testimony
• US CPI may inform post-March FOMC pricing
• Peru’s central bank might be done easing, or very close to it
• Earnings season drones on
• How did US consumers kick off the new year?
• The UK economy is going nowhere
• Chinese inflation to remain very low
• BSP may deliver double-barrelled easing
• What now for Russia’s central bank?
• Global macro indicators

Chart of the Week

The US will be where almost all of the action across global markets will unfold this week. That’s one part due to several expected developments in the US, and one part because there just isn’t much by way of calendar-based risk elsewhere. Of course, in this environment, off-calendar, random developments, such as US policy crafted on the fly may dominate above all else.

Key will be Federal Reserve Chair Powell’s two rounds of Congressional testimony that offer the chance to update his thinking with fresh data and developments. Also key will be more US inflation reports and the first retail sales figures of 2025 as a smell test on how the consumer is holding up after a strong Q4. About seventy-five S&P500 earnings reports are due, but shock-and-awe names in, say, tech and financial services are already out.

Also watch for any substance behind President Trump’s warning late this past week that ‘retaliatory tariffs’ are being planned on “everyone” to be unveiled in a conference early in the week and that tariffs on Japan are being considered. This is not over folks; it’s just beginning. Trump’s fiscal agenda is starved for funding as I’ll argue and this poses a significant risk to the world—and US—outlook.

There will also be potentially significant developments in US budget negotiations geared toward delivering upon the Trump administration’s aggressive fiscal policy agenda. I’ve attempted to provide an update on the math around US budget talks and how Trump’s first 100-day plan is evolving so far for spending and revenue targets. Let’s just say they have a great deal of work to do, the bar for success is set very high, but they have a considerable amount of time left to achieve the President’s goals. The potential consequences to the deficit, twin deficits, debt issuance, bond yields, a potentially massive surge of private savings, and Federal Reserve policies are significant and mapped out. At this point, it seems safe to say that the US twin deficits will remain high and probably widen considerably further in coming years.

Elsewhere, UK macro data, a trio of central bank decisions out of Peru, Philippines and Russia, about 45 Canadian TSX earnings reports and limited Chinese inflation and financing data are on tap.

US BUDGET TALKS—A STEEP HILL TO CLIMB

A key question on the minds of many clients is whether Congress can succeed in delivering budgetary goals on taxes, spending increases, spending decreases and the deficit. If so, then when? What would be the net effects on the deficit and debt of the US government? What could happen to the debt ceiling? And how could fiscal and monetary policy interplay with one another?

It is premature to answer these questions aside from the rhetorical commitments of the Republicans in both chambers of Congress who are involved in the process, but we’re starting to get a better picture of how the priorities are being bandied about.

Budget Reconciliation—Probably Two Bills

First up is the ‘how’ part. There could be one or two bills that seek to deliver upon the goals within Trump’s stated desire to achieve them within the first 100 days of his term and hence by early May.

In order to maximize the chances of achieving the 100-day plan, Congress is making use of the Budget reconciliation process. This allows for legislation affecting revenues, expenditures and the debt limit to pass by simple 50+1 majority in the Senate that could be settled by the Vice President’s vote instead of by 60 votes, thus avoiding the filibuster and Senate gridlock over major proposals.

In short, reconciliation is an easier, partisan way of getting major bills through given the GOP’s slim majorities in both chambers. The GOP holds 53 out of 100 Senate seats with the Democrats having 45 and two independents. The GOP holds the House by a 218–215 spread with 2 vacancies for the slimmest of majorities. The GOP therefore has very little margin for error in securing widespread support with the Republicans assuming most if not all Democrats won’t go along.

Congress can normally only use the budget reconciliation tool once per year, but a reconciliation bill was not passed for fiscal year 2025 which means the tactic can be used twice this year. Trump keeps saying that he would like ‘one big, beautiful bill’ including tax and spending measures but could tolerate two bills. Others say one bill would be too complicated to achieve all of that at once. Given that Trump has indicated he wants tax cuts to be passed within his first 100 days and given that time is ticking, reconciliation has to proceed rapidly to enable passage in both chambers and have the bill(s) signed by Trump into law. Nevertheless, it’s only February.

The House GOP Is Divided...

An extension of the ‘how’ part involves explaining that the two chambers are going separate routes.

The House—traditionally the chamber that controls the purse—normally leads the process. House GOP members, however, are getting bogged down in competing proposals and disharmony between spending hawks and moderates.

Initial unconfirmed proposals in the House that have been reported through media outlets looked to $300B of spending cuts with $325B of more spending split between defense and border initiatives. Initial proposals would have left spending largely unaffected on net. A second recent proposal sought $900B of cuts with $300B of new spending for a net $600B reduction of spending. House Speaker Johnson has naturally expressed optimism that they can achieve agreement—with some members pushing for larger cuts—but others are skeptical.

…so the Senate is Taking the Lead This Week

Senator Lindsey Graham—who chairs the Senate budget panel—said this past week that the Senate will start its own budget reconciliation plan out of frustration toward the inability to strike agreement in the House. “It’s time for the Senate to move,” he said, with plans to advance a budget blueprint this week and “Hopefully we’ll get started next week marking it up in committee.”

Graham has indicated that a super bill is unlikely and is initially setting more moderate spending targets that would be able to deliver upon border and defense spending proposals. He pledged to fund the increases with offsetting spending cuts or measures to raise more revenues. Whatever the House settles on has to pass the Senate in one or two bills.

The Starting Points for the Numbers

Now for the starting numbers, with the obvious caveat that at this stage they are meant to be very rough and to be further informed by evolving developments.

The US government’s total spending in 2024 was about $6¾ trillion including $881 billion on net interest payments. Of that $6¾ trillion, $4.06T was mandatory spending that is required by law and also known as entitlement spending or direct spending. This is almost two-thirds of US government spending and includes Social Security, Medicare, Medicaid, Veterans benefits and interest.

Discretionary spending is $1.81 trillion and requires an appropriations bill each year for Congress to approve spending levels. Discretionary spending includes defense spending of about $881 billion and most education spending.

Mandatory spending includes big ticket items, like $1.3T on Social Security, $1.89 trillion on Medicare, and $618B on Medicaid. Most of this spending was originally declared by Trump to be off limits for cuts. Now, however, it appears that Elon Musk’s DOGE (Department of Governmental Efficiency) is searching for savings in these areas.

It would be very difficult to gut discretionary spending by enough to achieve the House GOP members’ high-end targets for up to $1 trillion in total spending cuts and a stretch to achieve even the lower end if mandatory spending is left untouched.

What They’re Thinking of Doing on Taxes and Spending So Far

Table 1 shows an attempt at projecting the budgetary changes. 

What is in red reflect the White House’s recently stated priorities for tax cuts over the next ten years. Tax initiatives that have been previously proposed but not recently emphasized by Trump are shown in black as are tariff revenues. All of these revenue projections are drawn from the Tax Foundation’s model-based estimates.

The estimates for tax revenues are from the Tax Foundation’s costing. They tend to be near the lower end of the estimated ranges in order to be reasonably conservative. The sum total of all tax measures according to them would amount to $6.8 trillion over ten years, or $7.7 trillion if we only use President Trump’s recently stated priorities.

By contrast, the Committee for a Responsible Federal Budget pegs the revenue costs of Trump’s tax priorities at between $5 and $11.2 trillion over ten years (here).

Then come spending increases. Yes, increases. Both chambers appear to be leaning toward roughly $300 billion per year of additional border and defence spending split roughly down the middle. It’s unclear if this is for a temporary period and then cuts will be enacted or made permanent, but I’ve gone with what seems to be vague guidance about a four-year plan.

The cost of deporting migrants is shown using the American Immigration Council’s estimated cost of deporting about 1 million illegal migrants per year (here). Here too there are high uncertainties not least of which around how quickly the mass deportation can occur and for how long. If quickly, the up-front cost is much higher; if slowly for a long time then they explain that the costs would be more spread out but amount to a higher overall tally.

Next are the possible spending cuts if they are possible to achieve through Congress and the courts.

Next are the effects of shutting down or curtailing agencies. There is a lot of uncertainty around costing these ideas not least of which because they’re seemingly being made up on the fly.

For instance, the Education Department employs 4,400 people and its budget is about $68 billion. Trump probably cannot eliminate the department without Congress but can sharply reduce funding. This amount sounds big but is a small portion of the overall budget. Cutting it would mean offloading costs and responsibilities onto state governments. In that scenario, savings at the Federal level to fund other spending initiatives and tax cuts would be offset by tax hikes at the state level unless they too dramatically scaled back service. The Education Dept also manages $115B of student aid and what happens to that is unclear.

Eliminating USAID—the US government’s foreign aid program—carries potential budgetary savings of about $40 billion based upon public sources for the size of its budget. Critics note that this would dramatically scale back US influence abroad and with negative effects on health and poverty programs.

Estimated savings of Federal staff reductions—if achieved—tend to be at most in the tens of billions of dollars out of the nearly $300B spent on the Federal civilian payroll and probably closer to $10B per year. Only a fraction of that workforce is thought likely to be reduced either through voluntary buyouts or layoffs. This recent Brookings Institution piece provides estimates but more importantly an explanation of the complications and legalities.

Other proposals may shift federal responsibilities for part of Medicaid onto states. Other than very vague guidance that Elon Musk’s DOGE initiative is pouring over ways to trim costs we don’t have much to go by.

The Punchline—Bigger Deficits and Debt Appear Likely

The punchline is shown in the detailed calculations shown in table 1 and ensuing charts based upon these attempts at what we kind of know but with big caveats around what is likely to become further informed.

In order to achieve all of President Trump’s recently stated priorities for tax cuts plus what Congress is working toward on possible spending increases minus what they have sought thus far for spending reductions, the cumulative deficit over the next ten years would have to rise by trillions and trillions of dollars.

The cumulative deficit over the next ten years would rise from a CBO baseline estimate of about $21 trillion to $25.2 trillion if all of the proposals—including tariff revenues—are included. If tariffs are excluded, then the cumulative deficit would rise to about $29 trillion. If tariffs and lower priority tax items are excluded, then the cumulative ten-year deficit would rise to nearly $30 trillion.

The deficit-to-GDP ratio would be at a persistent 6% of GDP under the CBO baseline but rise to 8% under full proposals with no tariffs (chart 1).

Over the next ten years by 2034, public debt outstanding would rise by a further US$4 trillion above the CBO’s baseline scenario that had already been projected to rise by about $20 trillion from today’s levels assuming tariffs and all initiatives. On a CBO basis this would mean public debt rises toward $53 trillion in ten years time. On a Treasury basis that includes the Federal Reserve’s holdings, public debt would rise to at least $57 trillion—or nearly three times higher than when Trump won the 2016 election.

The debt-to-GDP ratio would rise by 8–9 percentage points above the baseline scenario that was already projected to rise by about seventeen percentage points toward a combined total of 126% (chart 2). 

Other estimates have far higher debt-to-GDP scenarios including the aforementioned estimates from the Committee for a Responsible Federal Budget (charts 3).

The Debt Ceiling And Empty Promises

Such effects would require a large increase in the debt ceiling which is very likely why President Trump has suddenly advocated getting rid of it compared to previous opposition to doing so when the Democrats were in power.

While Treasury Secretary Bessent tamps down concerns about debt issuance ‘for the foreseeable future’ and dismisses inflation risk, he has mixed motives.

It may also be because he is aware of much more severe plans to shutter broad swathes of the Federal government in which case at least some of the costs would be offloaded onto other layers of government.

He may also be masking the extent to which the Trump administration is serious about using tariffs, although the costing estimates provided in the table I’ve offered would be insufficient. Indeed, as noted many times, however, the math on the tariff base doesn’t line up well with hype around replacing income tax revenues (chart 4). The math also assumes that imports wouldn’t be crushed by tariffs and that the rest of the world would not retaliate and damped US and global growth.

I personally put a lot of stock in the likelihood that Trump is biased toward a much bigger amount of public debt outstanding. Recall that Trump widened the fiscal deficit from about 2½% of GDP just before winning the election in 2016 to almost double that just before the pandemic struck. Tax cuts do not pay for themselves. Spending cuts this time around would have to be vastly more severe than anything that appears to be either proposed or discussed.

Further, the lagging effects of dollar strength are likely to continue widening the US trade deficit (chart 5) plus there are the strong-dollar implications of US policy. America is not on a path toward addressing its ‘twin deficits’ and appears to be making wrong choices that would inflame them further from here.

Or promises must be broken by some combination of the President—who claims social security won’t be touched—and what the House and Senate work out as a pair of compromise bills—or future administrations when the problem becomes more acute.

And/or the US private sector may sharply ramp up its savings perhaps also induced by the long-run effects of fiscal plans upon rising interest rates.

Time will tell, but much further progress is required, and the net fiscal effect across governments also has to be considered including the offloaded costs onto states.

Bad Timing for the Federal Reserve

Right now, markets have nothing material priced for the FOMC’s March 19^th meeting, a one-in-five chance at a quarter point cut priced for the May meeting, and a full cut priced only by the September meeting.

And yet if two budget reconciliation bills that deliver these very roughly estimated numbers based upon information we think we know so far do arrive by early May, then they may be signed into law just before the FOMC’s May 7^th decision. This kind of expansion of the long-run fiscal deficits of the US government and their impact upon the economy could very well thwart any further monetary policy easing and quite possibly for much longer than priced.

US CPI—UPDATED SEASONALS TO COMPLICATE EXPECTATIONS

It seems to be nearly a sure bet that the FOMC is going to be on hold at the March 19^th meeting. Chair Powell said at his January press conference that “We do not need to be in a hurry to adjust our policy stance” and when pressed to clarify March expectations repeated this message.

This week’s inflation signals might inform the path thereafter, alongside other data and developments not least of which being policy shifts by the US administration. The May 7^th meeting is priced for half of a quarter point cut at the time of writing.

The consumer price index for January and annual revisions on Wednesday and then the producer price index for January the next day will combine to inform the next reading of the Fed’s preferred price deflator for total consumer spending that lands at the end of the month. We use CPI pushed through the sausage grinder that is the different weights and methodology of the PCE gauge, and PPI for the share of its basket that gets included in PCE.

CPI is expected to rise by 0.2% m/m SA with core CPI excluding food and energy up 0.3%. Producer prices are expected to behave similarly, with total prices up 0.2% and core up 0.3%.

Nowcast measures like the Cleveland Fed’s also point to 0.2% for total CPI and 0.3% for core.

One downside may be that January’s seasonal adjustment factors tend to be on the lighter side in recent years (chart 6), but offsetting this in part is that the seasonally unadjusted price gains to kick off the year tend to be stronger in recent years (chart 7). That should restrain the rise somewhat before the SA factors begin to be higher than normal in recent years. 

What causes some uncertainty about the SA adjustments, however, is that this release will include annual adjustments to seasonal adjustment factors for all months stretching back over the past five years (here).

Another downside could be vehicle prices. Based on industry guidance and seasonal adjustment factors, new and used vehicle prices appear to have fallen and may shave 0.1–0.2 ppts off of headline CPI. The caution is that how we track vehicle prices doesn’t necessarily match how CPI captures them given different samples and quality adjustments.

What may have offset these two moderating effects is an acceleration of core goods prices after softness the prior month and if pre-tariff stockpiling took effect.

Further, shelter CPI including OER remains sticky with another 0.3% rise expected. But the key may come down to core services CPI that comprise about one-quarter of the CPI basket and that have slightly decelerated while remaining sticky nonetheless (chart 8). Price signals within ISM surveys are volatile but generally trending higher and firmly particularly for services (chart 9).

CENTRAL BANKS—POWELL TO HEADLINE

Federal Reserve Chair Powell’s semi-annual Congressional testimony may be key this week amid an otherwise tame set of central banks. Three regional central banks will offer decisions this week and may impact local markets.

Federal Reserve Chair Powell’s Testimony

Chair Powell delivers his semi-annual testimony before the Senate Banking Committee on Tuesday at 10amET (watch here). He then repeats the testimony before the House Financial Services Committee on Wednesday at 10amET (watch here).

He will come armed with fresh readings on the job market (recap here). The fact that CPI arrives on Wednesday at 8:30amET may put a different twist on the House testimony, or at least offer an updated comment.

But a couple of updated data points won’t change Powell’s prior guidance that “We think disinflation continues on a broad and bumpy path, that tells me we don’t need to be in a hurry to adjust our policy stance.” It will only be about two weeks since he last spoke. For a fuller review of what he said at the January 29^th FOMC go here.

Also watch for any greater pressure on Powell to communicate his interpretation of what tariffs could do. He now has more facts on the matter, including the imposition of additional tariffs on China and its mild retaliation, plus the postponed tariff announcement against Canada and Mexico.

Peru’s Central Bank—Probably, Possibly, Maybe Done

Peru’s central bank is expected to hold its reference rate unchanged at 4.75% on Thursday after cutting in January and by a cumulative 300bps since September 2023. BCRP guided at its last statement that the policy rate “is approaching the level estimated as neutral.” Since it said that, Peru’s total inflation rate slipped again to 1.9% y/y and with core CPI at 2.4% and hence close to the middle of the 2% +/-1% inflation target range. What may lean toward risk of a further cut is the inflation data paired with the fact PEN is a touch firmer to the USD since the last meeting. What leans to a hold is that Peru’s economy grew faster than expected in November GDP which arrived after the January decision.

Bangko Sentral ng Pilipinas—Double-Barrelled Easing

BSP is expected to cut again on Thursday. A 25bps reduction to 5½% would make cumulative easing an even 100bps. BSP is also contemplating a large reduction in the reserve requirement ratio for lenders by about the middle of this year.

Russian Central Bank—Could it Surprise Again?

The Central Bank of Russia surprised markets by holding its key rate at 21% back on December 20^th against expectations for another large 200bps hike. Will it surprise again this Friday? The evidence is mixed. The ruble has appreciated by about 5% to the dollar since the last meeting which leans toward a hold given that tighter financial conditions were cited for the surprise hold in December. And yet, both headline and core inflation have increased further.

GLOBAL MACRO—US CONSUMERS AND THE UK ECONOMY IN FOCUS

Chart 10 highlights the rest of the lighter than usual line-up of global indicators. 

The main one for the US will be Friday’s retail sales. We know that new auto sales fell 7% m/m SA in January which should weigh down headline sales. Gasoline prices were also very slightly cooler in seasonally adjusted terms. Core sales may get a lift from Johnson Redbook same store sales that were tracking 4–5% higher in y/y terms. Friday also brings out industrial output that may rise given signals from ISM-manufacturing’s production gauge and via utilities given weather effects.

The UK economy’s monthly data dump on Thursday. This will include Q4 GDP, plus December readings for industrial output, services activity, construction output and trade. The prior batch of monthly readings disappointed expectations. Essentially no growth is expected for the overall fourth quarter as the economy hovers near recession following no growth in Q3 either (chart 11).

Canada is expected to post mild gains in manufacturing shipments and wholesale sales in December’s releases on Friday. Advance ‘flash’ readings some upside that might be a little firmer as the Canadian dollar depreciated over the month awhile late month data collection lags.

The second estimate for Eurozone GDP (Friday) will fill in some details and may reveal revisions to the initial 0% q/q SA reading. Eurozone employment growth for Q4 arrives at the same time. Details behind Germany’s initial -0.2% m/m CPI estimate for January (Thursday), Norway’s CPI (Monday) and GDP (Tuesday), and Swiss CPI (Thursday) round out the calendar of releases.

China will report CPI and PPI inflation for January on Saturday. Producer prices are being dragged lower by commodity prices while CPI is hovering near 0% y/y. Core CPI is only slightly firmer. Also watch for the possibility that aggregate financing figures may be released this week or the following weekend.

India’s CPI report for January (Wednesday) arrives too late for the Reserve Bank of India’s recent decision to have cut but should demonstrate some relief particularly through key staples in the Indian diet (chart 12).

Latin American markets face a light calendar beyond Peru’s rate decision. Argentina’s CPI (Thursday) will remain in nosebleed territory but falling further below 118% y/y. Yes, 118%. Brazilian inflation (Tuesday) may ease somewhat but inflation expectations remain high (chart 13).