Background of the Fitch Rating Cut

Last week’s other big news was a decision by Fitch Ratings to downgrade the US Treasury’s credit rating to AA+. This table puts that in perspective against other major developed economies.

Among these, only Germany and Australia still have the top-tier AAA rating. The US and Canada are one step below with AA+, followed by the UK and France at AA-, Japan with an A rating, and Italy the lowest at BBB. Now, do the ratings mean much in practice? None of these governments present serious default risk. But they do (roughly) follow the debt-to-GDP ratio, suggesting debt levels are probably a factor.

In case you missed it, credit-ratings agency Fitch Ratings downgraded U.S. debt by one notch (from “AAA” to “AA+”) late last Tuesday.

Bond yields are rising (and inversely, bond prices are falling) since the U.S. Treasury announced it would boost the size of its quarterly bond sales for the first time in more than two years. It’s making the move to finance trillions in fiscal spending obligations.

Last Monday, the Treasury said it’s targeting an increase in its cash balance to $750 billion at year-end. And it plans to issue more debt (in the form of Treasury bills, notes, and bonds) in 2024 as well. As Bloomberg reported last week…

“According to Barclays Plc strategist Joseph Abate, [the cash-balance plan] would cause T-bills to exceed the 20% ceiling of overall debt suggested by the Treasury Borrowing Advisory Committee, a panel of bond-market participants.”

The next day, Fitch referred to a “deterioration” of the country’s finances, overwhelming debt, and the “erosion of governance” in its decision.

But here’s the situation…

The Treasury needs more cash to fund the spending plans of Congress. And the Federal Reserve is continuing its runoff in holdings of Treasurys (up to $60 billion per month) as part of its balance-sheet trimming in the inflation “fight”.

When you add it all up, one thing is clear:

The supply of U.S. government bonds in the market is going to soar in the coming months.

In turn, that will push yields higher. And it will create a situation in which Uncle Sam will potentially pay bondholders more and more, on balance, to fulfill its bloated obligations in the years ahead. That’s especially likely if interest rates remain higher than they already are – which is the highest they’ve been in 15 years – for longer.

Over the past decade or so, the Fed might’ve been compelled to cut rates in a situation like this. Or perhaps it might add to its already out-of-control balance sheet to help out the Treasury over in the other part of town.

But as we’ve learned, inflation changes the game.

The best the Fed can do right now is hold rates where they are. The central bank is stuck unless it can find some excuse to change up its inflation fighting stance.

China

2023 was the year that China’s economy was supposed to come roaring back following the end of its zero-COVID policy, but all of the indicators are pointing in the opposite direction. Data has shown slowing growth and soaring youth unemployment, and there are many signs that deflation might be a bigger problem than previously imagined. The latest data today showed that Chinese exports suffered their worst fall since the start of the pandemic, while its CPI came in flat in June and producer prices have gone into a tailspin.

China ended its zero-COVID policy when rising global inflation had already dented demand for its exports, and compared to the industrialized countries, there wasn’t as much excess savings to spend after the reopening. The PBOC has even cut interest rates to encourage consumption, but further stimulus may be challenging given China’s big debt problem and the weakness of the yuan. Bubbles in the property market have also led many to reassess their net worth, while an escalating trade war has seen manufacturing from Western multinationals outsourced to other countries like India and Vietnam.

Meanwhile, crackdowns in recent years have left the private sector reeling. The suspension of Ant Group’s IPO and the DiDi Global fiasco soured investment, while Beijing has led targeted campaigns against industries like media, education and even food delivery, sapping the confidence of the business community. The Chinese government is trying to repair some of the damage by courting big U.S. industry players – like JPMorgan’s Jamie Dimon and Tesla’s Elon Musk – but the restrictions on economic activity have prompted many Chinese citizens and companies to save their cash rather than spend or invest.

Deflation could beget deflation expectations, which may see demand suffer as consumers hold off on more purchases. Businesses would also make less revenue if they cut prices, meaning fewer jobs and reduced wages, and eventually lower consumption. “Problematic China statistics extend from macro statistics like GDP and unemployment to earnings,” notes SA analyst Logan Kane in China’s Economic Slowdown: A Wake-Up Call For The U.S. Economy. “Here’s what we do know: Investment in China has fallen sharply… there is a huge debt load… and China’s population is now falling.”

China is officially in deflation

Source: @economics Read full article

Credit Card Debt

It was only two months ago that Wall Street Breakfast: Put It On Plastic discussed the $1T U.S. credit card debt milestone, but it has now finally happened. Balances topped the record in Q2 as consumers continued to spend, according to the New York Fed’s Quarterly Report on Household Debt and Credit. The number of credit card accounts also increased by 5.48M to 578.35M, while the total limits on credit card accounts rose by $9B to a total of $4.6T.

High inflation is pushing more consumers to put non-discretionary spending on cards, while others may be having a harder time paring back their lifestyles despite the price pressures. Interest rates are compounding the issue, with the average annual percentage rate over 20%, making it a costly debt for consumers. It’s also higher than at any point since the Fed started tracking card APRs in 1994, contributing to the overall U.S. household debt that topped $17T in Q1.

Meanwhile, the flow into serious delinquency (that is, 90 days or more delinquent) for credit cards rose to 5.08% of total credit card balances in Q2, from 3.35% in Q1. However, that figure is “normalized” with pre-COVID levels, as during the pandemic, changes in buying patterns, fiscal stimulus, and forbearance programs kept delinquency rates low. Credit card issuers will also report their July delinquency and net charge-off rates next week to get a better view on the industry.

“Despite the many headwinds American consumers have faced over the last year – higher interest rates, post-pandemic inflationary pressures, and the recent banking failures – there is little evidence of widespread financial distress for consumers,” New York Fed economists and researchers wrote following the release.

“Non-revolving credit, such as personal loans and vehicle loans, has [seen] a slowdown over recent months,” added ING Economic and Financial Analysis. “Moreover, the latest Federal Reserve Senior Loan Officer Opinion Survey showed banks increasingly unwilling to make consumer loans.” Looking at individual stocks, investors can also discover the latest Seeking Alpha analysis on credit card players such as Visa (V), Mastercard (MA), American Express (AXP), Capital One (COF), Discover (DFS) and Synchrony Financial (SYF).

US Economy

The July payrolls report confirmed the downward trend in US employment growth, coming in well below forecasts.

However, the data miss wasn’t as severe as the headline figures suggest. A relatively large decline in state-level employment of educators was a key contributor. Substantial seasonal adjustments to this index tend to make it volatile.
Total employment remains below the pre-COVID trend, …