- Moody’s cut the US government’s credit rating, citing a growing debt.
- Last week, equities rallied after the US and China agreed on a trade truce.
- This week, all focus will be on US business activity data.
Equities ended Monday nearly flat as risk sentiment soured after Moody’s downgraded the US’s credit rating. At the same time, most investors preferred to stay on the sidelines ahead of a vote on Trump’s tax cut bill.
On Monday, Moody’s cut the US government’s credit rating, citing a growing debt. This dampened risk appetite and investor confidence in US assets. As a result, equities paused last week’s rally. Furthermore, the US government is set to vote on a tax bill that might further increase the debt burden. Such an outcome will weigh on sentiment. However, businesses might do better with decreased taxes.
S&P 500 outperforms peers (Source: Bloomberg)
Last week, equities rallied after the US and China agreed on a trade truce. After weeks of unsustainable tariffs, the two countries were finally ready to talk about better trading terms. As a result, tariffs in China dropped to 10% while those in the US dropped to 30% for a period of 90 days. The truce allowed investors to breath as it eased recession worries. At the same time, they regained confidence in US assets, boosting equities.
Optimism over the trade truce lingered throughout the week, supporting stocks. The move opened the door for more trade deals between the US and its partners. However, reports have shown stalled progress in some talks, like those with Japan. As a result, there is still uncertainty about the future.
Meanwhile, market participants also paid attention to US data during the week. Inflation eased more than expected while the economy remained resilient. The CPI came in at 0.2% in April compared to forecasts of a 0.3% increase. Meanwhile, the annual figure increased by 2.3%, below estimates of 2.4%. The figures increased the likelihood of a Fed rate cut in September. Market participants are currently pricing a 67% chance of such a move.
Meanwhile, retail sales increased by 0.1%, surprising economists who had expected no change. However, policymakers will likely wait for more data to gauge the impact of Trump’s tariffs. On Friday, data showed that consumer sentiment continued plunging. Meanwhile, inflation expectations soared to new highs.
This week, all focus will be on business activity data. Weak activity could signal cracks caused by Trump’s tariffs, increasing rate cut bets.
