How Markets Reacted to Fitch's U.S. Credit Rating Downgrade
On August 1, 2023, Fitch Ratings downgraded the United States' long-term foreign-currency Issuer default rating (IDR) to AA+ from AAA. The last time an international rating agency did so was 12 years ago when Standard & Poor's cut the U.S. credit rating from AAA to AA+ in 2011.
Fitch attributed the downgrade of the U.S. to several factors, including weakened governance, rising general government deficits and debt, medium-term fiscal challenges that remain unaddressed, Fed tightening, as well as potential risks of economic recession.
Fitch: "The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'A.A.' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions."
Biden officials quickly responded to Fitch's downgrade as Treasury Secretary Janet Yellen "strongly disagree" with the decision and regarded Fitch's change as arbitrary and based on outdated data.
Janet Yellen: "Fitch's decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world's preeminent safe and liquid asset and that the American economy is fundamentally strong,"
Unlike the sharp market shocks of 12 years ago, the rating downgrade this time was followed by a relatively muted reaction from the U.S. equity and debt markets, as well as the U.S. dollar.
In the case of S&P's U.S. rating downgrade in August 2011, the Dow Jones Industrial Average fell by about 600 points on the day following the announcement, and the S&P 500 Index fell by nearly 7%, causing it to be named Black Monday by market commentators. In contrast, U.S. stocks have been relatively calm this time; the S&P 500 Index fell 0.3%, while the Dow Jones Industrial Average even rose 71 points. The U.S. Dollar Index reversed losses and subsequently edged higher.
Fitch believes the bipartisan debt ceiling battle in the U.S. hurts U.S. credibility and deteriorating governance. It is puzzling that the institute did not react at the time but acted two months later.
Also, according to Fitch's projection, the U.S. economy will experience a mild recession in 4Q23 and 1Q24 due to tighter credit conditions, declining business investment, and weaker consumption trends. However, the latest employment data, strong GDP figures, and a steady decline in inflation imply that the economy could be headed for a less severe downturn than previously expected, known as a soft landing.
In general, when a credit rating agency like Fitch downgrades a country's credit rating, investors may demand higher yields on the bonds to compensate for the increased risk. But for now, the market hasn't lost its confidence.
As Ryan Sweet, chief U.S. economist at Oxford Economics, said:" Yet the U.S. government is no ordinary institution. U.S. Treasury securities are seen as a sure bet by investors and a one-tick downgrade from a single credit agency wouldn't threaten that status."
Alec Phillips, the chief US political economist at Goldman Sachs: "The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information; it should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change."
The market still needs time to digest Fitch's surprising action. Dear mooers, how will you interpret it?
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Scorched earf : Welcome to Joe Bidens Market
小粉红的papa : The impasse at the time of the bipartisan debt ceiling negotiations damaged America's credibility
SupRatt Scorched earf : Impeach asap
Weezerc77 Scorched earf : Yeah, the market has been rocking. Can’t handle how good the economy is? How low unemployment is? No recession? Maybe you prefer a felon in the White House.
73133832 : a felon is in the White House
MarketFortuneTeller : Fitch must shorted market heavily !
ネコくまモン : There's no way that Mr. Biden will lose support due to economic deterioration before next year's presidential election! That's why we will resolutely prevent a downgrade of US bonds that would lead to a decline in the stock market!
affable Blobfish_403 : Huiyu just told the truth. If all countries in the world pay for the US debt, America will continue to prosper; if the US debt is rotten in its own hands, the US will have a big deal of affairs.
Satan Weezerc77 : you mean a felon like Biden? I'm pretty sure he is under investigation for taking bribes and treason.
Optionlife : The bounce back on this will be serious get ready to ride the space ship
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