U.S. CREDIT MARKET OUTLOOK - BUDGET DEFICIT
Economists' forecasts vary widely for
the February monthly U.S. budget deficit to be released today.
However most agree on one point -- that the budget deficit for
the 1987 fiscal year will narrow substantially from 1986
levels.
    The report is likely to mean very little to the moribund
credit markets, however, which have been stilled by a stable
dollar and perceptions of steady Federal Reserve policy.
    Economists said that a leaner federal budget could help the
credit markets if it lowers the Treasury's financing needs and
results in lower interest rates, but investors may not respond
until they see evidence that this is taking place.
    Economists' forecasts for the February deficit range from
20 billion dlrs to nearly 30 billion dlrs, with most forecasts
clustered in the 26-28 billion dlrs range. This compares with a
deficit of 24.6 billion dlrs in February 1986.
    In January, the budget deficit was 2.1 billion dlrs,
leaving the fiscal year-to-date deficit at 65.6 billion dlrs.
    Most economists expect the 1987 fiscal deficit to fall to
180-190 billion dlrs from 220.7 billion dlrs in fiscal 1986.
    Kathleen Stephansen of Donaldson, Lufkin and Jenrette
Securities Corp, expects a 26.3 billion dlr February budget
deficit, and a 186.5 billion dlr fiscal 1987 deficit.
    Stephansen expects widening in the February deficit
relative to last year based on two developments.
    First, total revenues showed a slowdown in their yearly
growth rate relative to prior months' growth rates, she said,
as corporate and individual tax payments net of tax refund
payments appear to have been weak in February.
    "The second factor... is relatively strong outlay
performance," Stephansen wrote in a weekly report. "Data
available to date suggest that their year-over-year growth is
close to 4.3 pct, well above the 0.5 pct average that prevailed
in the last four months of the fiscal year."
    Joe Liro of S.G. Warburg Securities and Co expects the
February budget deficit to total 26-28 billion dlrs and the
fiscal 1987 deficit to be 190 billion dlrs.
    He said that as a result of the change in the 1987 tax code
and the new structure for determining withholding of personal
income tax payments, the Treasury is receiving less tax
receipts than it received at this time last year.
    "The Administration compounded a tricky situation by saying
how difficult it is to fill out the new W-4 tax forms he said.
"The wage earner was underwithholding at the beginning of the
year and continues to be underwithheld."
    By contrast, Ward McCarthy of Merrill Lynch Government
Securities Inc said that many taxpayers have probably delayed
filling out the new tax withholding forms, so that this has not
been a drag on tax receipts as others have argued.
    "The first half of the year brought strong tax receipts
from capital gains and the repeal of the investment tax credit,
which is expected to contribute a substantial portion of the
corporate taxes to be paid this week," he said in the firm's
weekly credit market memo.
    He forecast a February budget deficit of 20 billion dlrs,
and a fiscal 1987 deficit of 180 billion dlrs.
    In March, McCarthy expects to see a deficit of 23 to 24
billion dlrs compared with 30 billion dlrs in March 1986.
    But economists agreed that the federal budget deficit is
far from occupying center stage in the credit market's focus
and is unlikely to have an impact now regardless of its size.
    Yesterday, the key 7-1/2 pct Treasury bonds of 2016 closed
unchanged at 99-28/32 to yield 7.51 pct after trading in a
narrow range throughout the session.
    Fed funds traded from six pct to 6-1/8 pct yesterday, up
slightly from Wednesday's 5.97 pct average, and are expected to
open within that range today.
  
 Reuter
