A deal over the debt ceiling was reached just over two months ago, but the political dysfunction in Washington and the growing debt burden still seems to be a concern. Fitch Ratings has downgraded the United States’ long-term rating to AA+ from AAA, echoing a move made by S&P Global Ratings, which cut its rating for the U.S. in 2011 after a different government standoff. Fitch had placed America’s sovereign status on watch negative back in May, but the bipartisan agreement to suspend the debt limit until January 2025 wasn’t enough to calm its fears. Why credit ratings and agencies matter to investors.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” according to Fitch. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process [and] the GG (General Government) debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade.” How much is too much for the U.S. national debt?

Treasury Secretary Janet Yellen said she “strongly” disagreed with the downgrade, calling it “arbitrary” and saying that Fitch relied on “outdated” data. Many of the measures that the ratings company uses, “including those related to governance,” have “shown improvement over the course of the administration, with the passage of bipartisan legislation to address the debt limit, invest in infrastructure, and make other investments in America’s competitiveness,” she declared. Stock futures declined following Fitch’s decision, while the yields were volatile as investors assess the outlook for the $25T global Treasury market. Is the debt ceiling constitutional and has the U.S. ever defaulted?

It was only two weeks ago that President Biden created a team to assess ways to avert future standoffs over the country’s debt limit. “Now that the latest debt ceiling crisis is behind us, it is necessary to explore all legal and policy options to prevent Congress from ever again holding hostage the full faith and credit of the United States,” the White House statement said at the time. The working group, consisting of administration officials and no Republican members, is being led by White House Counsel Stuart Delery and National Economic Council Director Lael Brainard.

The US federal government’s net interest expense is surging, …

 

… and is expected to exceed all other programs in the next few decades.

 

 

US Economy

 

  • Consumer spending increased in June with gains across goods and services.
  • The savings rate declined in June.
  • Core inflation eased in June.
  • Retail inventories keep climbing.

 

 

  • Mortgage rates are holding near 7%.
  • Freddie Mac’s house price index was up in June on a year-over-year basis. Note that the index didn’t cross the zero mark in this cycle.

 

 

  • The median sale price is now above last year’s level, …

 

Source: Redfin

 

  • … as inventories tighten.

 

Source: Redfin

 

  • Inventories are expected to improve when mortgage rates move lower (as more sellers enter the market).

 

 

  • This chart shows the percentage of metro areas with negative rent growth.

 

Source: Apartment List

 

  • Vacancies are rising.

 

 

  • The Chicago PMI remains in contraction territory.

 

 

  • The Texas-area regional factory activity is still depressed as demand deteriorates.

 

 

  • Forward-looking indicators improved further in July.

– Expected orders:

 

– CapEx plans:

 

 

  • US (and global) factory activity remains depressed. Here is the ISM Manufacturing PMI.

 

 

  • Factories are shedding jobs.

 

 

  • The Atlanta Fed’s GDPNow model’s third-quarter growth estimate is at 3.8% (annualized). We should see this measure move lower over time.

 

 

  • The ADP private payrolls index topped expectations – again.

 

 

  • Job gains have been uneven across US regions.

 

 

  • Small businesses have been driving recent job growth.

 

 

  • Single-family rent inflation is slowing.

 

 

  • Historically, when inflation crosses 8%, it takes years, not months, before it falls back below 2%.
  • The drop in US inflation has been faster than in other developed countries.
  • Tight credit conditions point to downside risks for the economy, …

 

Source: Deutsche Bank Research

 

  • … and so do state and local tax receipts.

 

 

  • Nonetheless, BofA no longer sees a recession ahead (consistent with the FOMC).
  • The last time the Fed’s monetary policy was this restrictive was in 2007.

 

 

Market Data

 

  • It has been a while since the S&P 500 experienced a 1%+ drop. According to SentimenTrader, this type of dynamic is almost exclusively witnessed during bull markets.

 

Source: SentimenTrader

 

  • Five consecutive up months for the S&P 500 are rare and typically bullish.

 

 

  • The S&P 500 is entering a seasonally weak period.

 

 

  • The Q2 earnings season exhibited little pain for companies that missed estimates but no reward for beating estimates.

 

 

  • Time for a pause in the equity rally? Here is the share of S&P stocks above their 50-day moving average.

 

Source: Hugo Ste-Marie, Portfolio & Quantitative Strategy Global Equity Research, Scotia Capital

 

  • The S&P 500’s expected dividend yield is crashing relative to the 10-year Treasury yield.

 

 

Quote of the Week

 

“It is better to remain silent at the risk of being thought a fool, than to talk and remove all doubt of it.” – Maurice Switzer

 

Picture of the Week

 

Sandstone Butte, Capital Reef National Park, Utah

 

 

 

All content is the opinion of Brian Decker