A tale of two deficits

Marketplace

The episode examines macroeconomic headwinds, highlighting weak Treasury auction demand driven by inflation concerns and Federal Reserve uncertainty, alongside a strengthening U.S. dollar fueled by foreign capital chasing

Key takeaways

• Treasury auctions for two-, five-, and seven-year notes saw weaker-than-expected demand due to inflation fears and uncertainty over Fed policy responses.
• The U.S. dollar has reached a one-and-a-half-year high as foreign investors chase higher interest rates and finance AI data center construction.

Main topics

• Treasury auctions and bond market volatility
• U.S. dollar strength and foreign investment flows

Notable quotes

this year for the rates market in the U.S. has been death by a thousand paper cuts.

Conclusion

The episode provides listeners with a clear framework for understanding how fiscal policy,

Transcript preview

Speaker 2 (0:01) I want you to think big picture today. Very big picture. From American Public Media, this is Market Class. Speaker 2 (0:20) In Los Angeles, I'm Kyle Rizdahl. Monday to day five, October good as it always is. Have you along, everybody. There is a relative paucity of economic data this week. We're going to get some consumer sentiment figures, some monthly trade data as well. More on that in just a second. But we thought we would start today with our new best friend, the bond market. The Treasury Department is going to auction off a new round of government debt over the next couple of days. And therein, as Marketplace's Justin Ho reports to get us going, will lie clues about our economic future. Speaker 5 (0:54) A couple of weeks ago, the Treasury Department held an auction for two, five, and seven-year treasuries. Speaker 3 (1:00) And those auctions did Speaker 5 (1:02) not go particularly well. That's Winnie Caesar, head of strategy at CreditSites. She says demand for treasuries was much weaker than expected. And Caesar says it's hard to pinpoint just one reason why. Speaker 3 (1:14) I think that this year for the rates market in the U.S. has been death by a thousand paper cuts. Speaker 5 (1:21) Those paper cuts include concerns about long-term government debt, higher energy prices, which cause inflation more broadly. Also, recent economic data that have been stronger than anticipated. Alex Wolff, global head of macro and fixed income strategy at J.P. Morgan, says investors are also unsure how the Federal Reserve is going to react to all of this. Speaker 8 (1:40) And that's occurring amid all the noise and volatility that we're seeing both in oil prices and macro data. And it's creating, I think, a difficult environment for those participating in markets to know what is the right level of yields, where yields should be. Speaker 5 (1:52) And in recent weeks, investors have been looking for higher yields than the government's been offering. Investors have those same concerns ahead of this week's 10- and 30-year Treasury auctions. Chris Lowe, chief economist with FHN Financial, says today rates are higher across the board. Speaker 8 (2:08) And that simply jitters about the upcoming auctions. Speaker 5 (2:12) And Lowe says those jitters aren't just about the auctions themselves. What Speaker 2 (2:16) traders are telling you is that their primary concerns, inflation, Speaker 8 (2:21) excessive government spending, excessive government debt, all of those risks are going to remain in place. Speaker 5 (2:30) Which means investors think interest rates are going to keep rising. I'm Justin Ho for Marketplace. Speaker 2 (2:35) Here's an interest rate of no small interest to a large slice of the American economy. Mortgage News Daily has the average 30-year mortgage at 7.61%. Speaker 2 (2:48) Stocks generally up-to-date, technology in particular. We will have the details when we do the numbers. Speaker 2 (3:15) Seems the first couple of three elements in the program today are very big picture, macroeconomically inclined. Justin on bonds just now, Sabri on the trade gap in a minute. Right now, though, Kaylee Wells on the dollar. The greenback is the strongest it's been in a year and a half. That is good news if you're planning to buy maybe a fancy new European car. It's good news if you're the U.S. government and you're hoping for more foreign investment. But the reasons the dollar's going up may be not. Such great news. Here's Kayleigh. Speaker 7 (3:46) Two big reasons the dollar's going up right now, says senior fellow Joe Gagneau at the Peterson Institute for International Economics. One, the U.S. government has a lot of debt, and that pushes up interest rates. Speaker 8 (3:58) And higher U.S. interest rates attract foreign savers because they say, oh, there's a higher rate of return in the United States. Speaker 7 (4:05) More foreign investment means more demand for the dollar. The other reason it's strong now, businesses in the U.S. are also borrowing a lot, too, because of AI. Speaker 8 (4:15) There's just a lot of borrowing to finance data centers in the United States, and foreigners are investing in them. Speaker 7 (4:22) Meaning even more demand for the dollar. A strong dollar is good news for a very specific subset of consumers. If Speaker 5 (4:30) you want to go travel to Europe, it's great. Your dollar is going to go much further and you can have your vacation for a little bit cheaper. Speaker 7 (4:38) Brendan McKenna with the European Financial Services Group, Societe Generale, says for the rest of us who are not vacationing overseas. The Speaker 5 (4:46) U.S. dollar fluctuates so much where you're probably not going to feel dollar strength or even dollar weakness in your kind of regular day-to-day purchases. Speaker 7 (4:53) Eventually, the AI investment will calm down, as will the war in the Middle East. Chris Vacchio is head of futures and forex with the research company Tasty Life, and he expects the dollar to weaken by the spring. Speaker 5 (5:06) And that wouldn't be a bad thing, quite frankly, because lower interest rates in the United States going in hand with a weaker dollar would provide a lot of stress relief here domestically. Speaker 7 (5:14) Because, he says, the same things that cause a weaker dollar Lower interest rates, cooling inflation would also help make day-to-day expenses for cash-strapped Americans a little easier. I'm Kaylee Wells for Marketplace. Speaker 2 (5:42) The history of economics is dominated by men. Adam Smith, Thomas Malthus, David Ricardo, the list goes on. Said list, of course, leaves out half of the population, including for us today, the British writer Mariah Edgeworth, who lived and wrote back at the beginning of the 19th century. Edgeworth is the subject of a new book by Gina Smilak. She is the Brussels bureau chief for The New York Times. Her book is called The Invisible Hand of Mariah Edgeworth. Gina, it's good to talk to you again. Speaker 1 (6:12) Thanks for having me. So Speaker 2 (6:13) tell me how you came to this story of Mariah Edgeworth. Speaker 1 (6:18) I was reading The Worldly Philosophers by Hill Browner, which is one of the sort of classic economic histories. And he has a little aside where he mentions Mariah Edgeworth having existed. And I had never heard of her. And I am a big Regency novel nerd. So I was surprised I had never heard of her. So I ordered a bunch of her books and I was reading them. And I just kept thinking to myself, this is not sort of casually mentioning economics. She is hiding economics. all through these books. And so I became really interested in