Good morning. After two days of meeting with Chinese vice-president he Lifeng, Scott Bessent said “The talks have been productive.” He Lifeng called “constructive” meetings and said that a “important consensus” had been reached. It seems good to us, and we (and the market) are impatient to hear more details today. Are we going to get it? Send us an email: Robert.armstrong@ft.com And aiden.reiter@ft.com.
The budget is a bit frightening
While the noise of the trade war is calm – as slightly – there is more room in the first page for the American budget and deficit. More and more news emanates from Washington on budgetary negotiations, unexpected Proposals of the White House and Party divisions on the debt ceiling. The market takes note. The cost of one year Default credit exchange On a 5 -year treasure, or the price necessary to hide against an American sovereign defect, increases quickly. It is now about the same level as the past periods of debt brassard. Graphic via Alphaville::
Treasury yields have dropped in the past three weeks, but all the work has been carried out by lowering real interest rates (probably signaling lower growth expectations). Most measures in the term premises, additional return investors must maintain a longer duration, are always high compared to recent history. Investors are not in love with the risk of duration:
The chances of a short -term defect on American sovereign debt are of course very low. What CDs and term premiums tell you is that the chances of budget rupture and general partisan madness, with the possibility of assurance of a very stupid error, increase.
Since the suspension of the debt ceiling expired in January, the Treasury descends the general account of the Treasury, its cash balance at the Fed. At 583 billion dollars, we still have a little time before the “date X”, or the day when the funds are exhausted; The Treasury Department indicates that date X will be for some time in August, but it is only an estimate. If we miss, the American government will resort to “extraordinary measures“To avoid defect: the treasure will stop or buy various investments, and begin to immerse its hands in other money pots, such as stabilization of the exchange funds, To stay solvent. Hopefully we don't have to look so low.
Meanwhile, Trump seems to be determined to avoid the Internal Revenue Service, by arousing some to fear that tax revenues can be low this year – bringing us more quickly to date X. Entrances from April, when most American citizens pay their income taxes, generally represent 20% of annual income. This makes it a good month to assess income prospects. Fortunately, the entries were strong, explains Shai Akabas at the Bipartisan Policy Center:
We calculated that (IRS A) collected $ 900 billion in April, 9% higher than in April 2024. We also examined it on a weekly basis. . . And every week from (January to April) of this year saw the same daily or higher daily income as during the same period last year.
But we can be slightly lower than the budget estimates of the congress for this year calculations According to Penn Wharton's budgetary model, the receipts are slightly behind the level necessary to meet the CBO forecasts. And this includes a leap in customs income from higher rates and the recent import wave. In the first quarter of 2025, the United States collected $ 22 billion in customs income, 21% more than in the first quarter of 2024 and 18% more than in the first quarter of 2023. But this is a small sum against the 5.2 TN in total tax revenue that CBO was waiting for this year. In addition, if we assume that these imports have been withdrawn from the request, these additional income should evaporate in the next quarters:
In the coming weeks, various estimates will come out of the duration of our time until we reached the date X. However, the estimates are only that: the entries are sporadic and agitated, and it is not yet clear if the IRS will continue to work well. But investors can comfort that tax revenue is strong enough at the moment.
(Reread))
Has Greedflation occurred at all?
Last summer, we wrote three pieces on the concept of transplant, which we have described as
An increase in prices caused by an increase in business profits, as opposed to an increase in prices caused by high contribution costs that companies transmit to customers, which leaves stable profits. In the pandemic inflationary episode, the accusation against societies was that they used price shocks as a coordination mechanism. Under the cover of a general atmosphere of higher prices, companies have pushed higher prices than what was required by more expensive products, labor, etc. This padding benefits the costs of consumers.
Now that inflation has been stable for longer, we wanted to take another look. Have companies that pushed the prices particularly aggressively during the 2021-2023 inflationary episode saw a higher level of profit? Or, if they have seen a higher burst of profit, have they returned it since? Last year, we focused on the food and drinks industry, both because many industry companies report their price actions and because inflation in food consumption was particularly acute in the United States:
And within food, we have paid the most attention to the world cookie and the Mondelez candy manufacturer, because among large public companies, its prices were among the most aggressive. Looking at the world's world income divided into volume / mix and prices, two interesting things have happened. The price increases, which had been decelerated, ceased to do so. And the volumes, which began to vacillate, have worsened:
More than six years, Mondelez has increased prices by 44% in aggregates, just over 6% per year on average. This represents almost all the increases of around 40% of income from the income he saw during the same period.
It is interesting to note that Mondelez believes that it can push prices aggressively even in a much softer global inflation climate (apparently at an acceptable cost in terms of volumes). This reduces the idea that “Greedflation” uses high background inflation as a blanket for free price increases, at least in the case of Mondelez. But something we have noticed before is also true: aggressive prices seem to be relatively little to improve the margins (note that the sharp drop in margins in the last two quarters seems to be mainly down at high cocoa prices):
Insofar as the prices increased the profitability of Mondelez, it did so by increasing income and keeping more or less stable margins (unless the prices of the wild cocoa). As you can see, after a certain delay, these higher prices filmed the operating cash flows, which struck a tray of about a fifth higher than pre-countryic:
But here is the thing: the CPI price index is also up approximately a fifth from the pandemic. Mondelez has therefore taken this price to maintain the benefits roughly in the same place in real terms. It is a simplification of course; Mondelez is a global company, so its profits must be taken into account in terms of global inflation, and not American. And more importantly than that, there are always much more in a large business than simple volumes and prices. However, the basic point stands. In Mondelez, one of the most aggressive price takers in an industry that has experienced a lot of inflation, it is difficult to find proof of cheerfully.
Are there any graft proofs elsewhere? Or can we treat the concept as a historical oddity and move on?
Correction
In Friday's letter, we wrongly indicated that Taiwan has a massive trade deficit with the United States. We have moved our wording – Taiwan manages a surplus of solid trade, not a deficit, with the United States. Our apologies.
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