#TradeWarEases #Fed #USeconomy
Monday on global financial markets was marked by highly contradictory signals. On one side, news of the downgrade of the US credit rating, fiscal concerns, and hawkish statements from the Fed. On the other hand, confident forecasts from the administration about an impending economic "boom" and strong macro data. In this flurry of data and opinions, let's try to understand what was really driving the markets and where we are headed.
Main headline of the day: The last bastion has fallen. Moody's stripped the US of its top rating.
So, late Friday evening, Moody's joined S&P and Fitch, downgrading the US government credit rating from the highest "Aaa" to "Aa1". The reason? The same old song: rising national debt and expanding budget deficit, along with "funding issues" in a high-rate environment. This event seemed poised to crash the markets. However, as one insightful analyst noted, "what Moody's did was more symbolic. Other agencies had already downgraded the debt rating." And honestly, "Moody's report revealed nothing that every investor didn't already know about the fiscal situation in the US." It seems the markets took this as "cover to catch their breath" after a turbulent rise.
Political Background: From "legacy" to "boom."
Instead of lamenting, the Trump administration went on the counterattack. Treasury Secretary Scott Bessent, without batting an eye, stated that the deficit is due to "the Biden administration and the spending we've seen over the past four years," claiming to have inherited a deficit of 6.7% of GDP – "the highest when we were not in recession and not at war." His mission, he said, is to "cut spending and grow the economy."
But that’s not all. The Director of the National Economic Council at the White House, Kevin Hassett, even predicted an economic "boom" in the second half of 2025, with growth "significantly above" three or even four percent! Well, a claim for "one of the best years in history." What are the grounds for such optimism? Promises of trade deals, clarity on tax cuts, "very strong employment figures," and, attention, "capital investments in the first quarter" surged over 20% – "one of the best quarters in history." It seems the White House believes America is on the brink of a "golden age."
Tax spoonful of tar: Barrels of honey, barrels of debt.
Against the backdrop of all these statements, a key congressional committee approved President Trump's proposed tax cut bill. We are talking about "hundreds of billions of dollars in new, unsecured sources of funding for tax cuts." Investors, it should be said, did not particularly appreciate this gift, fearing that it would "increase the debt burden more than previously expected."
Market Reaction: Yields up, stocks down (but not all), dollar in a knockout.
Treasury Bonds: This is serious. The yield on 30-year Treasury bonds has surged to an 18-month high of 5.037%, while 10-year yields have exceeded 4.5%. This is a direct consequence of fiscal concerns. And it's no joke, as "mortgage rates, auto loans, and credit card rates follow the yield of 10-year bonds," which means a direct impact on the pockets of ordinary Americans.
Stock Markets: The day started with a sharp drop in futures (Dow was down over 300 points!), but then the markets showed resilience, recovering a significant portion of the losses. Nevertheless, the S&P 500 fell by 0.41%, Nasdaq Composite by 0.62%, and Dow Jones Industrial Average by 0.15%. Tech giants (Palantir (-2%), Tesla (-3%), and Apple (-2%)) led the losses, as they are most sensitive to rising yields. Global indices also weakened, indicating spreading nervousness.
US Dollar:No surprises here – the dollar weakened broadly, falling more than a week against the yen, Swiss franc, and euro. ECB President Christine Lagarde did not hold back, stating that "the recent fall of the dollar reflects a loss of confidence in US policy."
Fed: Rates on the path to cuts.
The cherry on top is the comment from the President of the Atlanta Fed, Raphael Bostic. He suggested that the Fed might only be able to lower interest rates "by a quarter point" by the end of the year. Why so modest? Concerns about "inflation growth fueled by higher import tariffs." Here’s a direct clash: the Trump administration predicts an economic boom on the wave of trade deals (and likely new tariffs), while the Fed already sees how these tariffs might limit its ability to ease monetary policy.
What’s the outcome? A complex puzzle.
Monday was a true test for the markets. We saw how fiscal concerns, bolstered by the rating blow and new tax plans, pressurized bond yields and the dollar exchange rate. However, while White House officials were giving confident forecasts about a "golden age" and strong growth, the markets were trying to find a balance between short-term negative news and long-term optimism. The ability of stock indices to recover part of the losses and the powerful rally of the past week, fueled by trade deals, show that not everything is so straightforward. Investors will have to solve this complex puzzle: will the administration's economic "boom" be strong enough to offset rising fiscal risks and potential restraints from the Fed? Time will tell.