Triple-A headache
Triple-A headache
Fitch Downgrades US Credit Rating: A Dent in Reputation and Dollar’s Health
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A look at the day ahead in U.S. and global markets from Amanda Cooper.
The Surprise Downgrade
Two out of three ain’t so good. On Tuesday, Fitch became the second major agency, after Standard & Poor’s in 2011, to strip the United States of its prized triple-A credit rating. Fitch cut it by a notch to AA+ and cited fiscal deterioration over the next year and repeated down-to-the-wire negotiations on Capitol Hill over the country’s debt ceiling.
The timing of the downgrade has caught a few in the market by surprise. Two months ago, lawmakers were haggling over the government borrowing limit, and the two sides seemed so far apart that the process threatened to tip the world’s largest economy into a technical default. However, Fitch had already warned back in June, after the crisis was resolved, that it would finalize their view at a later date.
Market Reaction
Investors have responded to the downgrade by knocking equities and scooping up government bonds. This has pushed the yield on the 10-year U.S. Treasury note down towards 4.0%, while the dollar is looking fragile.
For now, investors agree that the downgrade is unlikely to do much to shift international demand for Treasuries or for U.S. stocks, which explains the relatively muted market reaction. However, it does dent the country’s reputation and puts the health of U.S. public finances in the spotlight. This factor, according to many market watchers, is expected to act as a negative driver of the dollar over the longer term.
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Cascade of Credit Implications
A May report by Moody’s Analytics, a unit of rating agency Moody’s Investors Service, warned that a downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other institutions.
There have been consistent warnings from rating agencies, ANBLEs, politicians, and strategists that the U.S. government spending relative to tax collections is not sustainable. Fitch predicts that the U.S. general government deficit will rise to 6.3% of GDP this year, from 3.7% in 2022.
Jefferies notes that with two of the three major agencies listing U.S. debt at AA, U.S. bonds no longer count as AAA in some key indices. However, most investors have already moved away from strict criteria around holding triple-A rated debt, given that Germany is now the only large issuer left with that rating.
Not a Good Look
With a presidential election just over a year away, the timing of the credit downgrade is not ideal. It places the health of U.S. public finances under scrutiny and casts a shadow on the country’s reputation.
While international demand for Treasuries and U.S. stocks may not be significantly affected in the short term, the downgrade serves as a reminder of the ongoing challenges and risks faced by the U.S. economy. It highlights the need for policymakers to address the unsustainable government spending and find a more sustainable path for the nation’s finances.
Key Developments
In addition to the downgrade, there are other important developments that could provide more direction to U.S. markets:
- U.S. corporate earnings: Dupont Nemours, Exelon, CVS Health, Entergy, Kraft Heinz, Garmin, Yum! Brands, Phillips 66, Bunge Ltd, Lincoln National, Albemarle, Occidental Petroleum, ETSY, Cognizant Technology Solutions, Atmos Energy, Equinix, Qualcomm, MGM Resorts, Ingersoll Rand, MetLife, Clorox, Marathon Oil
- U.S. ADP July private sector payrolls
- EIA weekly crude stocks
These events will be closely watched by market participants to gauge the overall health and direction of the U.S. economy.
In conclusion, the downgrade of the U.S. credit rating by Fitch is a blow to the country’s reputation and raises concerns about the health of its public finances. While the immediate market reaction has been relatively muted, the long-term impact on the dollar and credit implications for other institutions cannot be ignored. It serves as a reminder to address the unsustainable government spending and find sustainable solutions to ensure the nation’s economic stability. With key developments on the horizon, all eyes will be on the U.S. market’s response in the coming days.
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