Insights 
VT 
The US House has passed a $9 billion spending cut bill supported by President Trump. This follows approval from the Senate the previous day.
These cuts mark the first rescissions request successfully executed by a US president in some time. The administration suggests that further requests could occur during the current term. The cuts predominantly impact public broadcasting and foreign aid.
Bill’s Next Steps
The next step for the bill is for President Trump to sign it into law.
We see the newly passed legislation as more symbolic than economically significant. The proposed cuts represent a tiny fraction of the federal budget, which the Congressional Budget Office projects will exceed $6.5 trillion this year. The market’s immediate reaction should therefore be focused on the signal this sends, not the dollar amount itself.
The hint of future rescission requests from his administration is the key takeaway for traders. This introduces fiscal policy uncertainty, which could cause a rise in market volatility from its currently subdued levels. We will be watching the VIX, which has hovered in a relatively low 12-15 range for months, for signs of a shift in sentiment.
Implications For Markets
We believe a sustained effort to reduce government borrowing could put downward pressure on long-term bond yields. A historical parallel can be seen in the post-2010 European austerity era, where countries signaling fiscal discipline eventually saw their borrowing costs fall. Traders should consider positions that would benefit from lower yields if this becomes a recurring theme.
A perception of greater fiscal discipline in the United States could also be a tailwind for the dollar. The U.S. Dollar Index (DXY) has already shown strength this year, and this policy direction would likely add to its appeal against other major currencies. This could present opportunities in currency futures and options.
Derivative traders should now look beyond broad indexes and focus on sector-specific volatility. Options on ETFs for sectors highly dependent on federal outlays, such as defense and infrastructure, will become critical tools to watch. We will be monitoring for increased implied volatility in these specific areas as a hedge against larger, future announcements.
