The Big Picture

Briefing.com Summary:

*The SCOTUS ruling on IEEPA tariffs could reshape the deficit outlook, potentially requiring refunds and affecting interest rates.

*Lower interest rates could ease fiscal strain, but sustained borrowing needs make that outcome increasingly difficult.

*Markets still remain relatively calm despite trillion-dollar deficits and debt sustainability concerns.

When the monthly Treasury Statement for September was released, it contained a nice surprise. The government managed to reduce the budget deficit in FY25 by $41.4 billion from the budget deficit recorded in FY24.

That's the good news.

The bad news is that the budget deficit in FY25 was still a whopping $1.775 trillion, underscoring the point that the U.S. continues to have a spending problem. We don't think it will be cured of that anytime soon either.

Like Peanut Butter and Jelly

Entitlement programs, national defense initiatives, and the net interest expense for the $38 trillion national debt (and counting) are the perpetual albatrosses around the government's neck.

In fact, the U.S. government spent more for its net interest outlay in FY25 ($970 billion) than it did for national defense ($917 billion). It is no wonder, then, that administration officials are keen on seeing interest rates come down.

Lower interest rates would help reduce government spending, but ironically, that may not be possible when the persistence of trillion-dollar-plus deficits necessitates the issuance of a trillion-dollar-plus in government debt. And that is in a "tame" environment with the economy growing.

It could turn into a real mess if the deficit and debt, which go together like peanut butter and jelly, become indigestible for the nation's creditors.

Their dose of Pepto-Bismol, so to speak, would be higher interest rates, but that, in turn, could create digestive problems for the U.S. by increasing its net interest costs.

Like peanut butter and jelly, it can be a messy situation, but it isn't so messy right now. The 10-yr note yield at 4.06%, for instance, is 51 basis points lower than it was when the year began.

Various theories can be posited for why that is, but one that resonates this month, with the Supreme Court hearing the challenge to the president's invocation of the International Emergency Economic Powers Act (IEEPA) to levy tariffs, is that the increase in tariff revenue has helped limit the increase in the budget deficit.

The U.S. collected $77 billion in customs duties in FY24. In FY25 the U.S. collected $195 billion, with the bulk coming after "Liberation Day."

Briefing.com Analyst Insight

It will be several weeks, or perhaps months, before the Supreme Court issues its decision. There will be some deficit angst hanging in the balance, then, considering the tariffs that have been collected contributed to reducing the budget deficit in FY25. Furthermore, the tariffs expected to be collected in coming years have been advertised as a source of funds for covering the costs of the tax cuts approved in the One Big Beautiful Bill Act (OBBBA) so that it doesn't add to the deficit.

That view faces some dilution, however, in the event there is an actual dividend of "at least $2,000 a person" paid by the tariff revenue, as the president has suggested could be possible. Treasury Secretary Bessent suggested the tariff dividend might not be an actual payment but something that is embedded in the savings derived from the OBBBA's tax cuts. Time will tell, won't it?

In the meantime, the Supreme Court ruling is what matters most, and there are some strong thoughts, emanating from the line of questioning at the hearing, that the Supreme Court will uphold the lower court's ruling that the president overstepped his authority.

Such a ruling should include an order that the tariffs collected under the IEEPA authority need to be refunded. After all, how can the Supreme Court deem something illegal and then not require a refund of the tariffs collected under an illegal act? If it did not, it would be an accomplice to an illegal act, which is not a good look for the highest court in the land.

There are some potential plot twists, however:

1. SCOTUS could make that ruling but leave it to Congress to enforce the refund. A GOP-led Congress could conceivably slow-walk that process.
2. If refunds were required, a lot of businesses, like Nike (NKE), Five Below (FIVE), Caterpillar (CAT), Best Buy (BBY), and Masco (MSCO), would be helped by getting the tariff money back, so it could be seen as a boon for earnings prospects.
3. The tariffs imposed under IEEPA authority have stirred concerns about inflation picking up and growth slowing down, so if the tariffs were deemed illegal, investors could possibly see the revocation as a salve for those concerns.
4. In the event of a negative SCOTUS ruling, the Trump administration will work around it with stepped-up Section 232 and Section 301 approaches to tariffs, thereby mitigating concerns that IEEPA-related refunds will lead to higher deficits.

How the stock market reacts to a SCOTUS ruling that revokes the president's ability to invoke IEEPA to impose tariffs will be important. The real judge, though, is apt to be the Treasury market.

If the Treasury market thinks the U.S. won't be able to collect as much tariff revenue and/or has to refund the tariff revenue already collected, that may fuel deficit concerns that drive up interest rates. That all remains to be seen, but the Treasury market's response promises to be judge and jury on this matter.

So far, so good in that respect. Since the hearing on November 5, which many thought did not go the administration's way, the yield on the 10-yr note has come down 10 basis points. That makes us think that the market's take at this juncture on an adverse IEEPA ruling is that it will be more of a salve for inflation concerns than a boil for deficit dealings.

--Patrick J. O'Hare, Briefing.com