Straits Financial Chief Economist Commentary - June 2025

Summary

• Curbing the continued expansion of the US fiscal deficits and government debts was once claimed as one of Trump important policy goals during election. However, just four months after taking office, this goal has in fact been abandoned. This is reflected in the fact that Elon Musk has withdrawn from DOGE, and his efforts to cut fiscal spendings have failed; while the substantial increase in tariffs has been repeatedly put off and difficult to be truly implemented due to domestic opposition and the risk of capital market selloffs. At the same time, the "BBB" tax cut Act passed by the Republican-controlled congress will further significantly increase US fiscal deficits and government debts.

  
  

• Though some lawmakers and Elon Musk have expressed dissatisfaction and criticism of the "BBB" Act, we believe there is a high probability that it will still pass the Senate vote in July. Therefore, the Trump 2.0 administration has actually shifted completely from the fiscal austerity (through spending cuts and tariff increases) previously perceived by the market to further fiscal easing (cutting corporate and personal income taxes).

  
  

• The significant expansion of China's domestic fiscal policies and the "export frontrunning" this year are the main reasons for the better-than-expected perfomance of the Chinese economy.  The cumulative broad based fiscal deficits from January to April increased by more than 50% yoy. The cumulative net increase in government bonds from January to May reached 6.38 trillion RMB, compared to only 2.7 trillion RMB during the same period last year.  However, if no additional fiscal stimulus and government bond issuance quota are added for the whole year, the intensity of fiscal stimulus may slow down in 2H. Therefore, investors need to pay close attention to the government’s policy stance at the mid-year Politburo economic work conference.

  
  

• As Trump administration has made a U-turn on its fiscal policy stance, the overall pattern of US stocks has totally changed. The only risk affecting the further rise of US stocks in the future lies in the pressure from the treasury bond market. If the Fed cuts interest rates in a timely manner or the US government can adopt corresponding hedging measures, such as relaxing bank regulations, to reduce the pressure of Treasury bond issuance in the second half of the year, US stocks still have the opportunity to rise further.

  
  

• For A-shares and Hong Kong stocks, our overall stance is neutral to optimistic. The restart expectations of fiscal expansion in the US will be a boost to the global stock markets, including Hong Kong stocks.

  
  

• Overall, commodities are expected to rebound from oversold levels,  particularly those that experienced larger declines in the first half of the year. This outlook is supported by the reduced risk of tariff driven trade wars and low inventory levels in the current Chinese domestic market, resulting from previously over pessimistic market sentiment.

Previous Views:

We believe it will be  difficult for Trump to reach trade agreements with major US trading partners, and it will  also be challenging for him to impose substantial more tariffs. US stocks will likely fluctuate within the price range formed over the past month. Overall stance on A-shares and Hong Kong stocks is neutral to mildly optimistic.

Views in June:

I. Trump administration has abandoned the policy goal of reducing US fiscal deficits

After winning the election, one of Trump's key economic policy objectives was to reverse the expansion of fiscal deficits and government debt by cutting US fiscal spending and hiking tariffs. As a major supporter of Trump, Elon Musk strongly advocated drastic cuts in US fiscal spending, by establishing a new government branch called DOGE (Department of Government Efficiency) and claiming it would help the US government to reduce fiscal expenditures by US$2 trillion within two years. Meanwhile, Trump's Treasury Secretary, Mr. Bessent, repeatedly emphasized that the administration's goal was to control the ongoing expansion of fiscal deficits and government debt through tariff hikes and spending cuts.

However, just four months after the inauguration, these objectives have essentially been abandoned. First, after cutting spending in several government departments (such as the US Agency for International Development, USAID), Musk encountered enormous resistance in further reducing government agencies and fiscal expenditures. He was forced to announce his departure from DOGE at the end of May, failing to fulfill his promise to cut spending. Secondly, Trump's expectation to significantly increase  tariffs to boost fiscal revenue was met with strong opposition from other countries worldwide and  the US financial markets. As a result, US stocks plummeted, and Trump's approval ratings in public polls dropped sharply, ultimately forcing him to postpone reciprocal tariff increases.

So far, the Trump administration has failed to reach any tariff trade agreements with any major trading partners. From other countries' perspectives, as Trump faces enormous domestic pressure and fears that further tariff hikes could trigger another stock market meltdown, they are not eager to reach any trade agreements with the US — especially by accepting major concessions to Trump to avoid significant higher tariffs. Therefore, the likelihood and room for Trump to significantly boost fiscal revenue through tariffs in the future have greatly diminished. Finally, the US House of Representatives recently passed the Trump administration's "One Big Beautiful Bill Act," which extends corporate tax cuts and reduce certain personal income taxes (including taxes on overtime pay and tips), without  requiring significant fiscal spending cuts. According to estimates from the Congressional Budget Office, if implemented, the legislation is expected to add approximately US$3.8 trillion to US fiscal deficits over the next decade.

To summarize, after four months, most of Trump's policy initiatives aimed at  cutting fiscal spending and increasing fiscal revenue have hit a wall or been canceled. Meanwhile. The “One Big Beautiful Bill (BBB)” tax cut Act have been passed by the House of Representatives and now awaits a vote in the US senate. ). Therefore, taken together, it can be concluded that the "Trump administration has basically abandoned its stated policy goal of reducing fiscal deficits. According to the current policy trajectory, the US fiscal deficit is not only unlikely to decline as originally promised by Trump and his fiscal team upon taking office, but is in fact highly likely to increase significantly in the coming years.

Notably, some  voices in the Trump’s camp have also expressed strong dissatisfaction with this policy direction, most notably including Tesla CEO Elon Musk. Although he was forced to quit from DOGE and return to his management position at Tesla, he has openly criticized the Trump administration and Republican Congress for failing to cut fiscal spending and passing the "BBB" tax cut Act, which will further increase the US fiscal deficit. On social media, he has urged US voters to vote against all legislators who supported the "BBB" tax cut Act in next year's midterm election, even claiming that the US needs a third party to stop the current irresponsible fiscal and debt expansion. As a result, the relationship between Musk and Trump has deteriorated sharply, becoming a recent topic of market attention.

However, although Musk, as the world's richest person and a highly influential voice on social media has significant market influence, we believe he is unlikely to change the course of US fiscal trend. At most, his views may affect the outcome of next November's midterm elections. With one and a half years still remaining until the midterms, his opinions are unlikely to have much practical effect on current US political and economic policies. Therefore, we judge that the US Senate is still likely to pass the "BBB" tax cut Act in July. Although some provisions may be further amended, the overall trend of expanded US fiscal deficits and government debts will not change.

II. Market focus shifts from Trump tariffs to fiscal expansion & government debt financing

As repeatedly mentioned in our previous monthly reports, the core of US economic issues and stock market fluctuations over the past decade has actually been the US fiscal policy. In simple  terms, as long as US fiscal spending and deficits continue to expand, the US economy is likely to performs well and US stocks are expected to keep rising. But if US fiscal policy contracts and deficits decline—or even just the market expects significant future fiscal contraction—US stocks will have a selloff. In 2024, the US fiscal deficit accounted for approximately 6.8% of US GDP, the highest level in non-recession periods.

As shown in Figure 1, the overall US fiscal deficit ratio has been on an upward trend since 2016. During Trump's first term, the rise in the deficit ratio was mainly due to his corporate tax cuts, while the massive fiscal deficit expansion from 2020 to 2021 stemmed from three rounds of large-scale fiscal stimulus in response to the Covid: the first round occurred before the end of Trump's first term, and the latter two rounds took place during the Biden administration. After the pandemic, a significant decline in the US fiscal deficit ratio only happened in the first half of 2022 (which caused a sharp drop in US stocks then), the fiscal deficit has expanded again from the second half of 2022 to the present. Meanwhile, the US economic growth has performed well, and US stocks have continued to hit new highs.

Since the Trump 2.0 government, its high-profile claims to implement policies of cutting fiscal spending and significantly raising tariffs once caused a sharp stock market decline and market fears of the US economy falling into recession. In fact, both cutting fiscal spending and increasing tariffs (which raise fiscal revenue) would actually reduce the US fiscal deficit, a.k.a. fiscal austerity policies. Although fiscal austerity is undoubtedly a “correct” move in terms of controlling US debt expansion and improving fiscal sustainability, it is highly detrimental in short term to the US economy and the trend of risk asset prices such as the stock market. In our view,  this was the primary market concern that caused the sharp decline in US stocks earlier.

Previously, a popular market view suggested that the US stock market selloff was mainly due to concerns about the deterioration of US fiscal and government debt problems, leading to a massive outflow of global capital from the US. We believe this interpretation does not align with the facts. The main argument for this view pointed to the market reaction following Trump’s tariff hike announcements, US stocks fell while US Treasury yields rose sharply and the US dollar weakened, presenting a rare "triple kill" of stocks, bonds, and US dollar. Therefore, it is argued that concerns about the sustainability of US fiscal and debt issues are the main cause of the market selloff. However, we believe that US stock market investors, especially domestic investors, did not sell stocks because they were worried about the sustainability of US debt and fiscal deficit problems. On the contrary, they were concerned that the Trump government's implementation of "fiscal austerity policies" such as cutting fiscal spending and significantly raising tariffs would push the US economy into recession or even stagflation, while also causing market liquidity to tighten, leading to the simultaneous selling of US stocks and Treasury bonds.

Since the Trump administration began to retreat from reciprocal tariff hikes in mid-late April, coupled with Elon Musk's withdrawal from DOGE in May and votes of "BBB" tax-cut bill, the expectations of US stock market investors have actually changed completely. They believe that the Trump government has abandoned its so-called "fiscal austerity" policy stance and instead returned to the old path of US economic policies over the past decade, namely further fiscal deficit and debt expansion. As a result, risk asset prices including US stocks have been boosted again, and market sentiment has quickly shifted from pessimism to extreme optimism. For example, we can see that the "Greed and Fear" market sentiment index, which represents changes in risk appetite in the US stock market, has rebounded rapidly from near 0 (representing extreme fear) in mid-April to the most "greed" level since last October just in a month and a half (Figure 2).

But at the same time, the US Treasury market never recovers, with long-term Treasury yields even hitting new highs (Figure 3). This is because the market fears that the further deterioration of the US fiscal deficits will increase future government debt supply pressures. Meanwhile, as fiscal expansion policies continue, the probability of a US economic recession this year has dropped significantly, and stock market risk appetite has also risen markedly—both of which are unfavorable for bonds. Taken together, pressure in the Treasury market even amounted higher. This divergence illustrates that the earlier decline in US stocks was not driven by concerns about fiscal deficits or government debt expansion, but rather by fears that fiscal austerity would trigger an economic recession.

Thus, although Trump has not reached any tariff agreements with major trading partners, the market’s focus has shifted from US tariff negotiations to future fiscal expansion and government debt supply in the US.

First, the market is watching whether the "BBB" tax cut Act can be quickly passed by Senate and signed into law, as this will determine whether US corporate and personal after-tax incomes can further rise in the second half of the year. Data from recent years show that U.S. fiscal expansion policies had a significant impact on corporate and personal incomes. For example, from 2010 to 2020, US corporate profits grew relatively slowly, but since the large-scale fiscal expansion in 2020, profits of US-based companies—especially non-financial corporate profits—have risen rapidly, from US$1.3 trillion per year before the 2020 to US$2.9 trillion today (Figure 3). Over the last five-year period (April 2020 to April 2025), U.S. annual government fiscal spending averaged approximately US$6.8 trillion, representing an increase of US$2.3 trillion from the pre-pandemic’s US$4.5 trillion. During the same period, the fiscal deficit averaged approximately US$2 trillion per year, an increase of over US$1 trillion from the US$980 billion in FY2019. We believe that US fiscal spending and deficit expansion have been the single  most significant driver of corporate profit growth over the past five years. From the perspective of stock market investors, continued fiscal deficit and spending expansion is therefore broadly viewed as a positive development.

However, bond market investors may be facing greater concerns. If the "BBB" tax cut Act is voted through the Senate in July, it would signal the beginning of a new phase of significant expansion in US Treasury bond supply.  Due to the current debt ceiling constraint, the total US Treasury debts stayed around US$36.2 trillion  since the beginning of this year. The "BBB" tax cut Act includes a provision to raise the US debt ceiling by US$4 trillion (some Republican lawmakers have proposed raising it by US$5 trillion, and Trump even expressed a desire to completely erase the debt ceiling requirement). One thing is certain: once the "BBB" Act is implemented, in addition to renewed fiscal expansion, US Treasury debt supply will accelerate significantly in the second half of this year. This is currently the primary concern for US Treasury market investors, especially against the backdrop of declining demand for long-term Treasuries from overseas investors, funds, and other institutions. A substantial increase in issuance scale will exert further upward pressure on Treasury yields.

This is also the main reason why Trump has become increasingly dissatisfied with the Fed's unwillingness to cut rates right away. If the Fed were to cut rates quickly now, it could at least significantly lower short-term Treasury yields, which would help increase market demand for Treasuries. Additionally, with lower short-term rates, the US Treasury department could use tools such as buying back long-term bonds, thereby suppressing long-term yields and reducing the government's borrowing costs. However, if the Fed does not implement significant rate cuts immediately, the debt issuance pressure from fiscal expansion is likely to further push long-term Treasury yields higher. This would not only increase the government's borrowing costs but also lead to further rises in US domestic consumer borrowing rates, such as mortgage and credit card rates.

Trump has recently intensified pressure on the Fed. From the Fed's perspective, however, until the final results of tariff negotiations are confirmed and the resulting inflation risks are deemed manageable, it will be difficult for the Fed to proactively slash rates to "support" the Trump administration's "BBB" Act and large-scale government debt financing.

III. China economy trend hinges on whether fiscal easing policies will continue in Q2

In last month's monthly report, we pointed out that since the beginning of this year, the significant expansion of domestic fiscal stimulus and the "export frontrunning" have been the main reasons for the better-than-expected overall economic performance. However, with the easing of pressure from the China-US trade war and after months of high-intensity export frontrunning, China's export growth is likely to decline to a certain extent in the future. Therefore, whether the current economic growth trend can be maintained largely depends on whether the Chinese government can further continue the current fiscal easing policies.

From the perspective of fiscal data, China's broad fiscal deficit from January to April this year was 2.65 trillion  RMB, compared with 1.73 trillion RMB in the same period last year. That is, the YoY growth rate of China's broad fiscal deficit in the first four months exceeded 50%. Among them, the public budget deficits increased from 855.7 billion RMB in the same period last year to 1.3 trillion  RMB accumulated in the first four months of this year, and the balance of government fund revenue and expenditure increased from 871.4 billion  RMB last year to 1.35 trillion RMB this year (Figure 4). Judging from the net increase of government bonds (including treasury and local government bonds) in May, the growth rate of the broad fiscal deficit in May will further outpace that of last year.

The Chinese government’s decision to increase fiscal stimulus this year serves, on one hand, to ease financial pressures on both companies and local governments. More importantly, it also aims to offset the impact of the tariff-driven trade war and broader economic pressures imposed by the Trump administration since taking office.  However, with the recent negotiations between China and the US, as well as Trump’s compromise due to his internal pressure, these impacts are getting lower. Therefore, for the domestic economy and capital markets, an important variable to observe in the future is whether the Chinese government will maintain current strong fiscal stimulus policy stance and the speed of government bond issuance in the second half of this year.

In terms of the pace of government bond issuance (including treasury and local government bonds), from January to May this year, the cumulative number reached 6.38 trillion RMB, a substantial increase from the 2.72 trillion RMB in the same period last year. On the one hand, this has led to a significant increase in the broad fiscal deficits of the government so far this year. On the other hand, it has significantly improved the fiscal situation of local governments, and has played an obvious supporting role in industrial outputs and household consumption through means such as consumption subsidies and tax reductions.

Based on the current government debt financing pace, there is no doubt that fiscal easing will be maintained until the end of the second quarter, but there is some uncertainty about whether the stimulus in the first half of the year can continue in the second half. According to the government work report on the "Two Sessions", the total incremental government bonds expected this year will be less than 12 trillion RMB, only a slight increase from last year. However, unlike in  previous years when government bond issuance was mainly concentrated in the second half of the year, this year’s issuance has been significantly front-loaded. It is expected that the net increase in government bonds in the first half of the year will exceed RMB7 trillion.

If the government does not  implement additional budget deficits and government bond quota (such as by further increasing consumption subsidy and local bond issuance quotas) in the second half of the year, it means that from the second half of the year, as the speed of government bond issuance begins to slow down, local fiscal spendings will once again tighten. That may cause the intensity of consumption subsidies and the growth rate of local investment projects to decrease too, thus creating pressure on economic growth. Therefore, investors need to further observe the mid-year Chinese Politburo economic work conference to see whether the central government will consider pushing for more fiscal easing policies in the second half of the year, even further increasing the overall budget deficit scale or local government bond issuance quota for this year.

IV. Market strategy

For US stocks, as Trump's fiscal austerity policy has been abandoned, and the expected passage of the "BBB" tax cut Act may instead lead to further fiscal easing, the overall pattern of US stocks has totally changed. The only risk affecting the further rise of US stocks in the future lies in the pressure from the treasury bond market. If the Fed cuts interest rates in a timely manner or the US government adopts appropriate hedging measures , such as relaxing bank regulations to reduce the pressure of Treasury bond issuance in the second half of the year, US stocks still have the opportunity to rise further.

For A-shares and Hong Kong stocks, our overall stance is neutral to optimistic. The restart expectations of fiscal expansion in the US are a boost to global stock markets, including Hong Kong stocks. However, for A-shares, it is still necessary to observe whether the Chinese government will consider continuing the current domestic fiscal easing policy in the second half of the year.

Overall, commodities are expected to rebound from oversold levels, especially those with larger declines in the first half of the year. This outlook is supported by reduced risk of tariff driven trade tension  and low inventories level on current Chinese domestic commodities, following a period of overly pessimistic market sentiment.