Read time: ~4 minutes

The new financial year has kicked off with markets still pushing higher. But the more interesting developments are coming from policy shifts — particularly in the U.S. — that could have wider implications over time.

Here’s what caught my eye recently…..

Debt Strategy, Shortened
Source: Bloomberg Television interview with Scott Bessent; The Next Economy – Florian Kronawitter, 2 July 2025

In the U.S., Treasury Secretary Scott Bessent has signalled a move to issue more short-dated debt, like T-Bills, while stepping back from longer-term issuance. He summed it up bluntly in a Bloomberg interview: “Why would we issue debt at current long-term rates?”

This shift has a few consequences. It keeps interest costs lower in the short run, but also makes the government more reliant on rolling over debt frequently. It’s a strategy that tightens the link between fiscal needs and monetary policy — what’s often referred to as fiscal dominance. That may sound abstract, but the takeaway is simple: markets are now watching whether central banks stay independent, or get pulled into meeting political objectives.

Florian Kronawitter at The Next Economy argues this could suppress long-end yields and weaken the U.S. dollar — but it’s a trade-off that historically comes with risks: higher inflation, more volatility, and eventually questions about credibility.

It’s worth hearing Bessent’s own words — you can watch the interview here on YouTube.

Morgan Stanley: Earnings Turning the Corner
Source: Morgan Stanley US Equity Strategy, 3 July 2025

Morgan Stanley remains constructive on U.S. equities — not just because of expected rate cuts, but because company earnings are starting to improve.

One of the signals they watch is how many companies are lifting their profit forecasts versus cutting them. Back in April, downgrades dominated. Since then, the trend has reversed. While not yet fully positive, the shift is helping to support markets despite mixed macro data.

Their base case — which we noted last week — still sees multiple Fed cuts in 2026. But the key message this week is that improving earnings expectations are now playing a bigger role in driving markets.

Valuations remain stretched, so any disappointments could bite. But for now, the fundamentals are moving in the right direction.

Bank Capital Rules Eased in the U.S.
Source: U.S. Federal Reserve announcement, 1 July 2025; Treasury Department remarks; Mayer Brown Commentary, July 2025

Another quiet shift came from the Fed, which moved to relax the Supplementary Leverage Ratio (SLR) for major U.S. banks. The change lowers the amount of capital banks need to hold against Treasuries and other low-risk assets — essentially removing a disincentive for holding government bonds.

Fed Vice Chair for Supervision Michelle Bowman framed it as making the system “safe to fail” — encouraging banks to be active during periods of stress without having to hold excessive buffers. Treasury Secretary Bessent has said this could lower yields by “tens of basis points,” a non-trivial move in fixed income markets.

Additional Reads

• Trade Watch
  Source: Pendal Weekly Update; Axios Markets – 2 July 2025

The U.S.–China agreement on rare earths looks set to unlock the removal of certain U.S. countermeasures. However, talks with Canada have stalled, with tariffs now back on the table. The 9 July deadline remains one to watch.

• Labour and Liquidity – Two Slightly Different Pictures
  Source: ANZ 5 in 5, 3–4 July 2025

In Australia, the unemployment rate has held at 4.1% for five consecutive months. Employment dipped slightly in May, but year-on-year growth remains solid at 2.3%. ANZ economist Maddy Dunk noted that the labour market remains resilient, but flagged the broader context — GDP per capita is still declining. ANZ expects this to keep pressure on the RBA to provide further policy support over the coming year. 

In the U.S., June’s payrolls report showed 135,000 jobs added — down from a 186,000 monthly average a year ago. Wage growth eased to 3.9%, with the unemployment rate steady at 4.2%. ANZ’s Bansi Madhavani highlighted that while the headline numbers looked solid, underlying momentum was weaker. She still sees the Fed cutting rates this year, though market pricing has pulled back somewhat. 

Final Thought

Markets are still grinding higher (new all-time highs last week), but policy settings are shifting — some in ways we haven’t seen in a long time. Shorter-term debt issuance, looser bank capital rules, and improving earnings are all part of the picture. The message here isn’t alarm — but awareness.

Looking ahead, this week brings two events worth watching: the Reserve Bank of Australia meets on Tuesday, with markets expecting no change but listening closely for tone; and the 9 July deadline for U.S. tariff decisions could reopen friction with key trading partners, including Canada. Both may set the tone for how policy risks are priced through July.