Five fundamentals for the week: Budget talk, deals and three indicators
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UPGRADE- US budget negotiations become the focus after Moody's downgraded America's credit rating on Friday.
- Investors eye fresh trade deals after the Sino-American de-escalation.
- A rate decision in Australia, UK inflation data and a key US business survey are also of high interest.
Downgraded – Moody's announced on Friday a lower credit score for the US, hitting market sentiment and diverting attention away from trade talks. There are also several significant economic releases.
1) US budget negotiations will likely end in more spending
Will politicians squeeze spending or raise taxes? Both are potential ways to reduce the deficit and tackle America's growing debt burden. Such questions seemed unimportant in recent years, as borrowing costs were low and money kept flowing into the US, regardless of the debt-to-GDP ratio.
This time is different, and Moody's only put the spotlight on it. It is essential to note that S&P and Fitch downgraded America's credit rating years ago. However, the move comes after the flow out of US Treasuries and the perplexing drop of the US Dollar (USD).
I expect politicians to refrain from any cuts to social programs – President Donald Trump does not want it, nor tax hikes. Investors would be disappointed if Uncle Sam asks them for more, and such moves are against the Republican Party's instincts. That could lead to more pressure on the US Dollar. The move has sent the 30-year yield – which impacts mortgages – to 5%.
2) Which country will be next to sign a deal with the US?
The US reached a deal with the UK and also de-escalated the draconian duties with China. However, US Treasury Secretary Scott Bessent threatened to slap the "reciprocal tariffs" that were announced in early April and abruptly delayed until early July.
India, Japan, Switzerland and other countries were reported to be close to an accord, while the EU, a major trading partner, seemed far away.
In addition, investors desire more progress in Sino-American talks, after US levies were lowered to a maximum of 30% – but only through August. In the meantime, the recent accords lift the mood, and investors appear to be sure more will come. However, patience will run out at some point.
3) RBA set to cut interest rates, but a surprise cannot be ruled out
Tuesday, 4:30 GMT. The Reserve Bank of Australia (RBA) has been slow to slash borrowing costs in comparison to its peers, but it moved in February and is expected to announce another 25 bps cut this week.
However, while inflation is marching lower, Australia's recent employment figures were excellent. RBA Governor Michele Bullock and her colleagues could surprise by leaving interest rates unchanged.
A rate cut may be seen as adapting to global headwinds, namely the potential for weaker Chinese demand for Australian metals, a result of the trade war with the US.
4) UK inflation set to rise, keeping British rates high
Wednesday, 6:00 GMT. It is that time of the year – in April and October, British regulators update energy costs, and that results in significant changes to headline inflation.
Economists foresee the headline Consumer Price Index (CPI) to have risen from the low 2.6% YoY in March. Nevertheless, core CPI, which excludes energy and food, is also expected to accelerate, from 3.4% to 3.6%.
That may cause the Bank of England (BoE) to leave interest rates unchanged at its upcoming meeting, supporting the Pound Sterling (GBP).
5) S&P Global's Services PMI will provide updated snapshot of the US economy
Thursday, 13:45 GMT. How do US businesses feel after some of the dust settled from the trade war? S&P Global's preliminary Purchasing Managers' Indexes (PMIs) for May are set to provide some answers.
The key figure to watch is the Services PMI, which represents the largest sector. In April, it stood at 50.8, just above the 50-point threshold that separates expansion from contraction.
Will it slip under 50? That would be worrying and hit Stocks and the US Dollar. On the contrary, a strong number would do the opposite.
Final Thoughts
The absence of any top-tier US economic releases does not mean a quiet week. On the contrary – it leaves more room for markets to respond to headlines, whether in trade or on the budget.
- US budget negotiations become the focus after Moody's downgraded America's credit rating on Friday.
- Investors eye fresh trade deals after the Sino-American de-escalation.
- A rate decision in Australia, UK inflation data and a key US business survey are also of high interest.
Downgraded – Moody's announced on Friday a lower credit score for the US, hitting market sentiment and diverting attention away from trade talks. There are also several significant economic releases.
1) US budget negotiations will likely end in more spending
Will politicians squeeze spending or raise taxes? Both are potential ways to reduce the deficit and tackle America's growing debt burden. Such questions seemed unimportant in recent years, as borrowing costs were low and money kept flowing into the US, regardless of the debt-to-GDP ratio.
This time is different, and Moody's only put the spotlight on it. It is essential to note that S&P and Fitch downgraded America's credit rating years ago. However, the move comes after the flow out of US Treasuries and the perplexing drop of the US Dollar (USD).
I expect politicians to refrain from any cuts to social programs – President Donald Trump does not want it, nor tax hikes. Investors would be disappointed if Uncle Sam asks them for more, and such moves are against the Republican Party's instincts. That could lead to more pressure on the US Dollar. The move has sent the 30-year yield – which impacts mortgages – to 5%.
2) Which country will be next to sign a deal with the US?
The US reached a deal with the UK and also de-escalated the draconian duties with China. However, US Treasury Secretary Scott Bessent threatened to slap the "reciprocal tariffs" that were announced in early April and abruptly delayed until early July.
India, Japan, Switzerland and other countries were reported to be close to an accord, while the EU, a major trading partner, seemed far away.
In addition, investors desire more progress in Sino-American talks, after US levies were lowered to a maximum of 30% – but only through August. In the meantime, the recent accords lift the mood, and investors appear to be sure more will come. However, patience will run out at some point.
3) RBA set to cut interest rates, but a surprise cannot be ruled out
Tuesday, 4:30 GMT. The Reserve Bank of Australia (RBA) has been slow to slash borrowing costs in comparison to its peers, but it moved in February and is expected to announce another 25 bps cut this week.
However, while inflation is marching lower, Australia's recent employment figures were excellent. RBA Governor Michele Bullock and her colleagues could surprise by leaving interest rates unchanged.
A rate cut may be seen as adapting to global headwinds, namely the potential for weaker Chinese demand for Australian metals, a result of the trade war with the US.
4) UK inflation set to rise, keeping British rates high
Wednesday, 6:00 GMT. It is that time of the year – in April and October, British regulators update energy costs, and that results in significant changes to headline inflation.
Economists foresee the headline Consumer Price Index (CPI) to have risen from the low 2.6% YoY in March. Nevertheless, core CPI, which excludes energy and food, is also expected to accelerate, from 3.4% to 3.6%.
That may cause the Bank of England (BoE) to leave interest rates unchanged at its upcoming meeting, supporting the Pound Sterling (GBP).
5) S&P Global's Services PMI will provide updated snapshot of the US economy
Thursday, 13:45 GMT. How do US businesses feel after some of the dust settled from the trade war? S&P Global's preliminary Purchasing Managers' Indexes (PMIs) for May are set to provide some answers.
The key figure to watch is the Services PMI, which represents the largest sector. In April, it stood at 50.8, just above the 50-point threshold that separates expansion from contraction.
Will it slip under 50? That would be worrying and hit Stocks and the US Dollar. On the contrary, a strong number would do the opposite.
Final Thoughts
The absence of any top-tier US economic releases does not mean a quiet week. On the contrary – it leaves more room for markets to respond to headlines, whether in trade or on the budget.
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