August 02, 2023

“The US government’s credit rating downgraded from AAA to AA+ by Fitch due to concerns over finances and debt burden. Treasury Secretary Janet Yellen dismisses it as ‘arbitrary’ based on ‘outdated data’.” 

Sam Cornford – Head of Trading 

Main Headlines

The US government’s credit rating has been downgraded following concerns over the state of the country’s finances and its debt burden. Fitch, one of three major independent agencies that assess creditworthiness, cut the rating from the top level of AAA to a notch lower at AA+. Fitch said it had noted a “steady deterioration” in governance over the last 20 years. US Treasury Secretary Janet Yellen called the downgrade “arbitrary”. It was based on “outdated data” from the period 2018 to 2020, she said. Investors use credit ratings as a benchmark for judging how risky it is to lend money to a government. The US is usually considered a highly secure investment because of the size and relative stability of the economy.

Bank of England’s monetary policy committee sits down on Thursday to decide whether to raise interest rates for the 14th time in succession. The nine members will meet with recession fears looming and calls that further hikes may tip the economy over the edge. The current cycle represents the fastest pace of rate rises in more than 30 years. It’s a toss-up between whether the sudden slowdown in manufacturing or the sharp correction in housing prices should give the Bank’s rate-setters the most cause for concern. Bank of England regulator Sarah Breeden will become the central bank’s next deputy governor for financial stability when Jon Cunliffe’s term ends later this year, Britain’s finance ministry said on Tuesday. Breeden will be one of four deputy governors at the BoE and will serve on its interest-rate setting Monetary Policy Committee (MPC) as well as two key supervisory bodies, the Financial Policy Committee (FPC) and the Prudential Regulation Committee.  

GBP

Sterling is stronger than most major currencies in morning trade. Britain is heading for an industrial recession as interest rate rises hammer factories, bosses have warned. Fhaheen Khan, senior economist at manufacturing industry group Make UK, said yesterday’s PMI shows “the economy is on the glidepath to anaemic growth with industry now at risk of facing a recession”. Inflationary pressures are tumbling as the sector goes into reverse and suppliers have to compete harder for business, while manufacturers have stopped raising prices for customers. At the same time “the rate of job losses accelerated to a seven-month high,” S&P Global said.  

EUR

Euro is weaker than most major currencies in the early morning trade. Germany plans to invest around 20 billion euros ($22.15 billion) in the semiconductor industry in the coming years, the economy ministry said on Tuesday, amid growing alarm over supply chain fragility and dependence on South Korea and Taiwan for chips. The money will be drawn from the Climate and Transformation Fund from 2024 onwards, the ministry said, adding that it could only give funding for individual projects after European Commission approval. It said Taiwanese semiconductor manufacturer TSMC expressed interest in investing in a semiconductor production facility in Germany and that the ministry was in close contact with the company over an investment decision. Yesterday, Bund yields and the euro fell due to weak PMI data, causing traders to lower bets on the ECB’s interest rate hikes. Today’s ECB bank lending survey and German IFO data might have a similar effect. The IFO business climate index is predicted to drop to its lowest since November, and the forward-looking expectations index may reach its lowest since December.  

USD

The Dollar is stronger against the euro and weaker against the Sterling this morning. Later today, the ADP Non-Farm Employment figure is released, providing an early look at employment growth, 2 days ahead of the government-released employment data that it’s designed to mimic. Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity. Over the last few months, the actual figure has been significantly higher than forecasted. Economists and analysts are increasingly hopeful that the Federal Reserve can avoid pushing the US into a recession, as inflation slows, and strong growth persists despite 11 interest rate increases. The Fed last week raised rates by another quarter percentage point to the highest level in 22 years. But a flurry of upbeat data has increased the likelihood that the central bank can deliver a soft landing — lowering inflation through tighter monetary policy without crushing economic activity.  

Markets

Global stocks dropped as Fitch Ratings’ downgrade of the US sovereign credit grade spurred a rapid retreat from riskier assets. Broad losses in Europe dragged the benchmark regional index down by the most in almost four weeks. S&P 500 and Nasdaq 100 futures slid more than 1%, signalling a sharp drop on Wall Street following five months of gains for US stocks. 

Main Economic Data/Central Banks/Government (All Times CET)

9:00 a.m.: Spain July Unemployment
9:30 a.m.: Switzerland July PMI Manufacturing
12:00 p.m.: Ireland July Unemployment Rate
1:00 p.m.: US MBA Mortgage Applications
2:15 p.m.: US ADP Employment Change
4:30 p.m.: EIA crude inventory report
5:00 p.m.: Denmark July Foreign Reserves
6:00 p.m.: Russia June Unemployment, Weekly CPI 

Corporate Events 

Earnings include Qualcomm, CVS, Shopify, Siemens Healthineers, Ferrari 

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