US Fiscal Policy May Accelerate in Q3, Real Interest Rates and Lower End of K-Shaped Curve to Boost the Dollar, Recycled Aluminum to Change Long-Term Supply and Demand Pattern --- 0702 Macroeconomic Insights
- U.S. fiscal spending for FY2026 is progressing slowly, with the deficit as of May reaching approximately $1.25 trillion, accounting for 61% of the annual plan. The acceleration of the Q3 fiscal deficit was driven by catch-up in welfare spending, interest outlays exceeding expectations, and the implementation of tariff rebates. Long-term bond yields are expected to fluctuate at high levels around 4.5% in Q3, and fall back to around 4% in Q4 as rate hike expectations ease and fiscal stimulus declines.
- The true driver of the U.S. Dollar Index is the real interest rate, whose underlying momentum comes from the growth expectations at the lower end of the K-shaped recovery. The market has overlooked the real estate recovery, which started at the beginning of the year. The procyclical narrowing of credit spreads has led to a counter-trend decline in mortgage rates, resulting in a second round of monetary easing.
- Global bauxite supply has shifted towards incremental dominance by Guinea. U.S. market premiums have been repriced by trade policy, Europe is caught between supply risks and weak demand, Japanese premiums reflect the Asian supply and demand climate, India has the potential for integrated expansion but with limited increments, and the rising share of recycled aluminum may alter the long-term supply-demand dynamics.
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