GM. This is Milk Road Macro, the newsletter that just spotted the biggest narrative plot twist since COVID; fiscal hawks are out, and Uncle Sam’s wallet is wide open again.

Here’s what we got for you today:

• ✍️ Tax cuts and spending drove a v-shaped rally

• 🍪 Moody’s downgrades U.S. credit rating

• 🍪 CPI cools as April inflation slows

TAX CUTS AND SPENDING DROVE A V-SHAPED RALLY

It’s been a crazy few weeks.

But we are now slowly getting a clearer picture of the Trump administration policy.

And it looks like we've recently made a rapid shift away from an environment that was very bearish for risk assets, towards an environment that could potentially be very bullish for risk assets.

OUT: Fiscal responsibility, cutting spending and big global tariffs (bearish risk assets)

IN: Big fiscal stimulus, large deficit spending, big tax cuts and relatively lower global tariffs (generally bullish risk assets)

This feels like it could be the biggest "narrative shift" since covid.

Crash up (so far)

And this narrative shift is being reflected in risk asset markets, like US stocks and Bitcoin.

Risk assets crashed down through March and early April, as markets worried about high global tariffs and US Government spending cuts.

But now, as the policy picture changes, risk assets are crashing up, in a similar fashion to how they behaved following the initial pandemic correction in early 2020.

We have a “V bottom” - so far, at least.

Bulls will label this price action a “lock-out rally” - with few if any buyable dips, forcing those “locked out” to capitulate back in at higher prices.

Bears will label this price action a typical short and sharp bear market correction.

Regardless, the recent rally in US stock indices has been historic.

Only matched by a handful of occasions over the past two decades.

The VIX (S&P 500 implied volatility, AKA the fear index) has dropped from more than 40 to less than 20 in only 21 trading days.

That’s the fastest drop in volatility ever.

(VIX up = bearish risk assets, VIX down = bullish risk assets)

A large VIX decline is often a bullish signal historically (but not always immediately).

This ongoing "policy narrative shift" was crystallized further last week, with two big key events:

1. A Chinese “deal”, seeing tariffs on China lowered from 145% to 30%, at least temporarily

2. The unveiling of President Donald Trump’s “Big Beautiful Bill”

And last week, as a more "risk-positive" US Government policy picture became clearer, both the S&P 500 and Nasdaq saw "perfect weeks".

A perfect week is when the index rises every day of a 5-day workweek.

Historically, this price behavior is uncommon.

It is often seen during bull markets, and rarely seen during bear markets.

Let's look in detail at the new Trump bill…

The "Big Beautiful Bill"

Just a matter of weeks ago, the talk from the Trump administration was of austerity, belt tightening and slashing the US Government's huge budget deficit (generally bearish for risk assets).

There was even talk of "balancing the budget" (this was always extremely unlikely).

But all of this has now seemingly been thrown out of the window.

The new tax bill currently making its way through the House has been dubbed the "Big Beautiful Bill" by President Donald Trump.

The bill makes permanent the prior Trump tax cuts and adds a large range of further tax benefits.

The current legislation is estimated to further expand the anticipated $2 trillion annual fiscal deficit.

The independent Committee for a Responsible Fiscal Budget estimates the bill, as it is currently written, would add between $3.3 trillion and $5.2 trillion to the national debt.

It also estimates that, in just the first year the policies would be fully in effect, the deficit would increase by nearly $600 billion, or 1.8% of GDP.

And the huge spending and tax cuts are likely to be front-loaded.

In very simple terms:

US Government spending is going up - not down.

And the US Government deficit is very likely to go up - not down.

The bottom line is this:

Last week, we learnt there is no real political incentive for US politicians to reign in spending.

The United States is already spending at a wartime deficit level.

But the mid-term elections are just around the corner next year.

And it appears that what we are likely to get is more of what we got during the previous Biden administration:

Spend, spend, spend.

It’s safe to say the Trump administration has thrown in the towel on the “hard path” toward a balanced budget. 

DOGE cost-cutting efforts appear to have been pushed into the background.

Paraphrasing Treasury Secretary Scott Bessent speaking on Sunday, they now plan to “outgrow the debt”.

So, what does greater deficit spending and tax cuts mean for risk assets?

Generally - it’s bullish, as long as it successfully translates into growth.

We saw under the Biden administration that massive Government spending was a powerful driver of risk asset appreciation.

And here we are again, with likely even more massive Government spending.

But there is still a long path to get this “Big Beautiful Bill” passed through both the House and the Senate.

There will likely be many weeks of wrangling ahead.

But the general direction now appears to be clear:

More spending.

Hold your horses

So, fiscal stimulus currently appears to be going ahead at full steam.

However, there is one big "forcing mechanism" that could put the skids on this massive expansionary fiscal plan and risk asset strength.

And that is the US Treasury market. 

A rapid rise in 10-year yields in early April has already forced President Trump into one big pivot on April 9 (tariff u-turn).

4.5% on the 10-year yield has now seemingly become the “Trump Put” level, for now at least.

But yields are rising again…

BITE-SIZED COOKIES FOR THE ROAD 🍪

Moody’s downgrades U.S. credit rating. This sparked market jitters, with Treasury yields spiking as investors reassessed risks tied to government borrowing.

CPI cools as April inflation slows. U.S. CPI fell to 2.3 percent, undercutting forecasts and sparking equity gains on hopes of a less aggressive Fed.

Jobless claims stay steady. Weekly jobless claims held at 229,000 signalling labour market resilience amid tariff volatility and supporting equity recovery.

MILKY MEME 🤣

RATE TODAY’S EDITION