US Loses AAA Status, Can Markets Still Score Record Highs on Successive 'Relief Rallies'?

US Loses AAA Status, Can Markets Still Score Record Highs on Successive 'Relief Rallies'?

The S&P 500 extended its strongest four-week bull run in five years and the docket eases back on major scheduled events, but a US sovereign downgrade raises concern.

Talking Points:

• Credit rating agency Moody’s announces a downgrade to the United States’ top rating
• The S&P 500 closed out another week’s climb, which has pushed the rolling 4-week rate of change to its most bullish since April 2020
• Top event risk this week shifts to the thematic: APAC rate decisions; major consumer inflation readings and May PMIs

Will a US Downgrade Waylay the S&P 500’s Recovery Rally?

After the New York closed Friday afternoon, credit rating agency Moody’s announced that it was cutting the United States’ sovereign credit rating one step from the top ‘Aaa’ to ‘Aa1’. There is an undeniable measures of surprise to come from this announcement given the market’s general downshift in existential fundamental concern this past week following the 90-day moratorium by the US and China on the extreme tariffs they enacted against each other in April. On the other hand, this downgrade was arguably a long time coming. Moody’s was the last of the major credit rating agencies to lower its measure of the world’s largest economy. Fitch cut the US to AA+ back on August 1, 2023, while Standard & Poor’s kicked things off way back on August 5, 2011 (also a Friday). Will this development curb the biggest, four-week S&P 500 rally in five years?

Chart of the S&P 500 with History of US Sovereign Downgrades (Weekly)

 

Source: John Kicklighter, TradingView

Relative to top, singularly-impactful event risk like the US CPI and the FOMC rate decision these past few weeks, the docket ahead is notably light on omnipotent catalysts over the coming week. That is not to say that none of the scheduled listings couldn’t produce an outcome surprising enough to generate heavy volatility or tap into a systemic theme so unbalanced that it wouldn’t kick in a thematic focus. However, the criteria for such distinct and severe market influence is materially more complicated. Overall, themes should be an important filter of incoming event risk as it has the potential of amplifying market movement that would otherwise be limited.

Calendar of Top Global Macro Event Risk

 

Source: John Kicklighter

Full Calendar

 

Active Central Bank Decisions: PBOC and RBA

For top listings covering the coming week, there are pockets of regionally-potent event risk, meetings and speeches and even earnings spread out. Monday brings April data from China. Tuesday kicks off the G7 financial ministers and central bank governors’ meetings. Lowe’s earnings will add to Walmart surprise this past week on Thursday. US national activity (from the Chicago Fed) will give an overview of the world’s largest economy. And, the Mexican trade balance for April will level set actual cross-board health with the US with the top tariff rate applied and reduced.

However, to tap a deeper vein, the monetary policy decisions out of China and Australia are more prominent events on the calendar. China’s PBOC is expected to lower its benchmark 1-year prime loan rate -10bps to 3.1 percent and the Australia’s RBA is seen cutting by -25bps to 3.85 percent both on Tuesday morning. For Australia, the policy decision is more a reflection on inflation expectations and speaks to the Aussie Dollar’s carry standing. In contrast, China’s policy adjustment is more a component of a larger dashboard being wielded by the government trying to engineer an economic recovery.

Chart of AUDCNH Exchange Rate, RBA and PBOC Benchmark Rates (Monthly)

 

SSource: John Kicklighter, TradingView

 

Differing Inflation Trends for Japan, UK and Canada

With a similar connection to monetary policy, a second degree run of event risk spread out globally and over the week are inflation readings. In particular, the consumer-level price measures for the United Kingdom, Canda and Japan will speak to complicated policy decisions as well as the potential for economic throttling owing to rising costs. The UK will report its CPI reading for April (along with the PPI) on Wednesday at 6:00 GMT. The headline inflation reading is expected to jump from 2.6 to 3.3 percent, which would be the highest reading since February 2024.

Looking at Canada’s inflation forecast, a sharp drop in the headline annual figure from 2.3 to 1.6 percent in April, which would match the lowest reading in the series since February 2021 – a factor that could lead the BoC to more confidently pursue rate cuts. As for Japan, another month’s tempo above 3 percent keeps the pressure on the BoJ to close the yawning gap in its monetary policy relative to its largest counterparts.

Chart Annual Consumer Inflation Series for Japan, United Kingdom and Canada (Monthly)

  

Source: John Kicklighter, TradingView

 

How Solid is the Economy Post-Tariff Relief?

One last larger theme to draw out of the listings from the economic calendar in the week ahead is a bead on the economic tempo from the developed world. With the shock and awe of – and subsequent reversal in – tariffs in April, there remains a distinct uncertainty as to course the global economy is on. While forecasts are useful, they are dictated by modelling and can over-emphasize recent developments and extrapolated on those data points.

That said, backward-looking data points are tangible but lagging. With that said, the May PMIs from Standard & Poor’s give an important milestone for a fundamentally volatile month. The data comes out Thursday and there has been very little trend to speak of in the series of late.

Chart of Monthly Composite PMIs of Major Economies (Monthly)

  

Source: John Kicklighter, Standard & Poor’s

 

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----Written by: John Kicklighter, Global Head of Content