Trump says he has no plans to fire Powell; TSMC reports - what’s moving markets
For the first time since 2016, the Federal government ran a budget surplus in June. Before the Financial Crisis, a surplus was the norm. However, since then, deficits have been the rule, not the exception. The cause of the $27 billion surplus was $27 billion in tariffs taken in. For reference, the government took in $23 billion in May and only $6 billion in tariff revenue in 2024. Additionally, spending cuts further supported the positive monthly fiscal balance.
Despite tariffs causing a surplus in June, the year-to-date deficit is running $1.34 trillion. With three months left in the fiscal year, the deficit is running about 5% higher than last year. While tariffs will help on the deficit front, interest expense is now the single largest line item causing the deficit.
It is estimated that the Federal interest expense for the fiscal year will exceed $1.2 trillion. Such is more than double what it was before the pandemic. While the amount of debt has increased significantly since then, the higher interest rates are the main culprit.
Any wonder President Trump is begging Jerome Powell to lower rates?
Low Versus High Beta Divergence
Not surprisingly, during this latest stage of the risk-on rally, characterized by speculative stocks leading the way higher, high beta stocks have become very overbought while low beta stocks are oversold. The first graphic below shows that the high beta factor is the most overbought factor on a relative and absolute basis. Conversely, low beta stocks are oversold on a relative basis and sit at fair value on an absolute basis.
The second graphic helps us appreciate whether the current performance divergence is extreme. It shows the z-score is over two standard deviations from its norm. Thus, the relationship over the last 126 days is getting extreme compared to the past relationship. This analysis coincides with our other technical analysis.
The market is overbought, and speculative stocks are clearly in vogue. Concurrently, low beta, more conservative stocks are out of vogue. A rotation, when it occurs, will likely favor low-beta, conservative stocks.
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