A sideswipe at the last remaining triple-A U.S. sovereign credit rating appears to have been batted away by bond investors so far – but the lingering risk of a government shutdown this week keeps a cloud over markets.
Moody’s, the credit ratings firm, on Friday lowered its outlook on U.S. government debt to “negative” from “stable” citing large fiscal deficits and a decline in debt affordability and dysfunction in congress.
It’s the last of the three major rating agencies to maintain a top rating for the U.S. Treasury as Fitch lowered its rating in August and S&P removed its AAA in 2011.
Moody’s analyst William Foster told Reuters on Friday the chance of a “significant policy response” to rectify the fiscal situation probably wouldn’t happen until 2025 “because of the reality of the political calendar next year.”
The U.S. Capitol dome is seen from the Russell Senate Office Building on Capitol Hill in Washington, U.S., April 19, 2023. REUTERS/Sarah Silbiger
And yet the clunky machinations of Congress and gridlock between the two main parties mean there’s still a chance government operations could be shut down as soon as Friday.
U.S. House of Representatives Speaker Mike Johnson unveiled a Republican stopgap spending measure on Saturday aimed at averting that, but it quickly ran into opposition from lawmakers on both sides.
All the more impressive then that Treasuries seem so calm first thing on Monday, with the 10-year Treasury yield hovering at about last week’s close at 4.62% – 3 basis points below Friday’s intraday high and still some 40bps below October’s peaks above 5%.
One one level, there’s some relief the rating was maintained despite the darker outlook. And on another level, there’s a mixed take on the implications of a shutdown – not least that it would dampen further economic activity in an already clearly slower fourth quarter.
That would keep the Federal Reserve at bay despite its warnings last week that another rate hike was still on the table.
However, the Fed focus this week was likely as much on the October consumer price inflation report on Tuesday and the retail sales data on Wednesday for guidance. Prices are expected to have remained sticky last month, while high street sales slowed.
Retail will be a theme of the week in corporate earnings too, with Tyson Foods out on later on Monday, Home Depot on Tuesday, Target on Wednesday and Walmart on Thursday. This month’s Thanksgiving holiday also focuses minds on shopping and the resilience of the consumer.
Overall, the sharp rally in Wall St stocks on Friday also showed a persistent seasonal bid for equities despite a rough week and Fed reality check on easing hopes. Futures were slightly in the red ahead of Monday’s bell, but the ViX volatility gauge remained subdued around 15.
World stocks followed through with slight gains on the back Wall St’s late-week strength, with China’s bourses more mixed ahead of a big economic data release schedule this week – including industrial and retail readouts for last month.
However, the main set-piece may well be in San Francisco where President Joe Biden and China’s President Xi Jinping are due to hold a much anticipated summit on Wednesday.
Elsewhere, British markets and the pound were stable amid a UK government reshuffle that saw the interior minister Suella Braverman lose her job and former Prime Minister David Cameron return as foreign minister.
Key developments that should provide more direction to U.S. markets later on Monday:
October Feberal Budget, New York Fed’s Oct inflation expectations survey
Federal Reserve Board Governor Lisa Cook speaks; Bank of England policymaker Catherine Mann speaks
U.S. corporate earnings: Tyson Foods, Henry Schein
U.S. Treasury auctions 3-, 6-month bills
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