Instant View: With Moody's Downgrade, U.S. Loses Treasured Aaa Credit Rating

Economic

Political

Summary:

“The downgrade is a wake-up call for Republicans. They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory.”

Moody's on Friday downgraded the credit rating of the United States by a notch to "Aa1" from "Aaa", citing rising debt and interest "that are significantly higher than similarly rated sovereigns".

U.S. President Donald Trump's sweeping tax bill failed to clear a key procedural hurdle on Friday, as hardline Republicans demanding deeper spending cuts blocked the measure in a rare political setback for the Republican president in Congress.

As written, the bill would add trillions of dollars to the federal government's $36.2 trillion in debt over the next decade.

"Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said in a statement.

U.S. Treasury securities fell and yields rose late Friday after the news.

COMMENTS:

STEPHEN MOORE, FORMER SENIOR ECONOMIC ADVISOR TO PRESIDENT DONALD TRUMP AND HERITAGE FOUNDATION ECONOMIST

“Outrageous. Moody’s has now become a political arm of the Democratic Party. How is extending the Trump tax cut going to reduce the value of the bonds. If a US backed government bond isn’t triple A asset then what is?”

CHRISTOPHER HODGE, CHIEF US ECONOMIST, NATIXIS, NEW YORK

"Fiscal profligacy and irresponsible governance - including the perpetual debt ceiling standoffs - aren't new and there will be a day of fiscal reckoning when Congress will have to reign in debt. But the US borrowing capacity is still unrivaled and potential revenue generation is unmatched. No doubt the US has a spending fueled debt problem, but there is little chance - at least in the medium term - that the US won't make good on its obligations. At some point the market will impose discipline that will force cuts but demand at the moment is still ample for US debt."

TOM DI GALOMA, MANAGING DIRECTOR OF RATES AND TRADING, MISCHLER FINANCIAL, PARK CITY, UTAH

"Very surprising. This is big, markets were not expecting this at all. I think that is highlighting the problems on the budget talks in Congress, the bill failed to pass today in the House committee."

SPENCER HAKIMIAN, CEO, TOLOU CAPITAL MANAGEMENT, NEW YORK

“The downgrade of the US credit rating by Moody’s is a continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector in the United States.”

“I didn’t even blink, totally not a surprise for me.”

BRIAN BETHUNE, ECONOMICS PROFESSOR, BOSTON COLLEGE, NEWTON MASSACHUSETTS

“This sounds similar to what S&P did in 2011. That S&P (downgrade) announcement was not well received by markets, and led to a budget sequester agreement…which led to a reduction in the deficit. Then Trump cut taxes (in his first term) so we backed out of the compromise.”

“The downgrade is a wake-up call for Republicans. They have got to come up with a credible budget agreement that puts the deficit on a downward trajectory.”

JAY HATFIELD, CEO, INFRASTRUCTURE CAPITAL ADVISORS, NEW YORK

"This news comes at a time when the markets are very vulnerable and so we are likely to see a reaction. I expect S&P to be down by nearly 100 points or so but expect it to stabilize later in the week. I suspect that all the tariff related announcement could have had also played a role in the downgrade, even if they don't say so."

Source: Reuters

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Central Bank

Political

The Federal Reserve plans to shrink its workforce by about 10% over the coming years, bringing the U.S. central bank in line with President Donald Trump's broader efforts to streamline the federal government, according to a memo that Fed Chairman Jerome Powell sent to staff on Friday.

In the internal memo, a copy of which was seen by Reuters, Powell said that he has directed Fed leadership to find "incremental" ways to trim operations, with a goal of shrinking the Fed's roughly 24,000 person headcount nationwide by about 10% over "the next couple of years." The memo was first reported by Bloomberg.

As part of that effort, the Fed plans to offer a voluntary deferred resignation program to board staff in Washington who would be eligible to retire at the end of 2027. The memo made no mention of any involuntary cuts or layoffs.

"Experience here and elsewhere shows that it is healthy for any organization to periodically take a fresh look at its staffing and resources," Powell wrote in the memo, noting the Fed previously made similar changes in the 1990s when President Bill Clinton sought to reduce the size of the federal government.

"I believe it is time to do it again, in that same conscientious and deliberate spirit," Powell added.

In the memo, Powell did not provide many details on how the Fed may revamp efforts, but emphasized any changes would prioritize the Fed's mandates and statutory obligations, and ensure that its work remains "high quality, nonpolitical and mission-focused."

The new Fed initiative comes as Trump has launched an aggressive effort to downsize and reshape the U.S. government via billionaire adviser Elon Musk's Department of Government Efficiency, or DOGE.

While the Fed does not have its budget set by Congress and does not report directly to the White House, Powell said the central bank must be a "careful and responsible steward of public resources." Powell gave a nod to the broader Trump-led effort by noting that the Fed often pursues cuts of its own "when there have been government-wide efforts to improve efficiency, like in the 1990s and now."

Source: Reuters

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Economic

Political

The vote in the House Budget Committee came despite Trump's call for Republicans to "UNITE behind" the legislation. "We don't need 'GRANDSTANDERS' in the Republican Party. STOP TALKING, AND GET IT DONE!" he said in a social media post.

Five of 21 Republicans on the panel voted to block the measure, saying they would continue to withhold support unless Speaker Mike Johnson agreed to further cuts to the Medicaid healthcare program for lower-income Americans and the full repeal of green energy tax cuts implemented by Democrats.

The budget committee later said that it would reconvene in a rare Sunday night 10 p.m. EDT (0200 GMT Monday) session to reconsider the legislation.

As written, the bill would add trillions of dollars to the federal government's $36.2 trillion in debt over the next decade.

"This isn't a grandstand," Representative Ralph Norman, one of the hardline conservatives who have spoken publicly about their opposition to the bill in recent days.

"We'll compromise somewhere, but just not giving the farm," the South Carolina Republican told reporters.

The vote is likely a temporary setback for the measure in a Congress that is controlled by Trump's Republicans and so far has not rejected any of his legislative requests.

Republicans are divided between hardliners who view the package as their best chance to cut spending and more moderate Republicans from competitive districts, who have warned that deeper spending cuts to social safety net programs could jeopardize the 220-213 seat House Republican majority in the 2026 midterm elections.

House Budget Committee Chairman Jodey Arrington stressed the legislation's importance to voters who elected Trump to the White House and gave the party full control of Congress last November.

"They want common sense policies. And they want from all of us a commitment to putting America and Americans first. Let's give the people what they voted for," the Texas Republican said.

'WRITING CHECKS WE CANNOT CASH'

Republican Representatives Norman, Chip Roy, Andrew Clyde, Josh Brecheen and Lloyd Smucker joined all 16 Democrats on the committee in voting against the measure.

"We are writing checks we cannot cash and our children are going to pay the price. So, I am a 'no' on this bill unless serious reforms are made," Roy, of Texas, told the committee.

The lawmakers said they hoped to reach a deal with Johnson to amend the bill over the weekend.

Roy, Norman, Clyde and Brecheen are members of the ultraconservative House Freedom Caucus, which later said in a social media post: "We are not going anywhere and we will continue to work through the weekend."

Smucker said his "no" vote, changed from an initial "yes," was a parliamentary maneuver meant to ensure the measure can be taken up again once Johnson has brokered an agreement. Smucker held out hope for another vote on Monday.

The legislation would extend tax cuts passed during Trump's first term. Congress' bipartisan Joint Tax Committee estimates the tax cuts would cost $3.72 trillion over a decade. Trump has highlighted measures including lifting taxes on tips and overtime that Republicans say would boost working-class Americans, while critics say the bill will offer more benefits to the wealthy.

Democrats condemned the legislation as a vehicle for giving billionaires tax cuts, while citing a projection from nonpartisan congressional researchers that proposed spending cuts to Medicaid and federally subsidized private health insurance available through the Affordable Care Act could lead to 8.6 million Americans losing health coverage.

"No other previous bill, no other previous law, no other previous event caused so many millions of Americans to lose their healthcare. Not even the Great Depression," said Representative Brendan Boyle, the committee's top Democrat.

The Republicans are split between three factions: moderates from Democratic-led states who want to raise a federal deduction for state and local taxes; hardliners demanding that a bigger SALT deduction be offset by deeper cuts to Medicaid and the full repeal of green energy tax credits; and other moderates determined to minimize Medicaid cuts.

The proposed legislation would impose work requirements on Medicaid beginning in 2029. Hardliners want those to begin immediately and have called for a sharp reduction in federal contributions to Medicaid benefits available to working-class people through the Affordable Care Act - an option vehemently opposed by Republican moderates.

Source: Reuters

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Economic

The economy faces threats from potential 36% reciprocal tariffs and an influx of cheaper Chinese goods, which could undercut domestic producers.

Maybank economist Erica Tay expects first-quarter GDP growth of 2.7%, down from 3.2% in 4Q, citing weaker performance in manufacturing and tourism-related sectors.

"Although exports were buoyed by frontloading, some of that demand was met by running down inventories, which capped the boost to industrial output," Tay said.

MALAYSIA

Malaysia reports April trade data on Tuesday, with markets looking for signs of export strain due to global trade tensions.

RHB's Chin Yee Sian expects increased pressure on export-reliant sectors, including electronics, machinery, and crude materials tied to U.S. and China demand.

April CPI, due Thursday, will likely show that inflation remains well-contained, potentially strengthening the case for Bank Negra Malaysia to cut rates later this year.

Still, focus remains on whether subsidy reforms-especially for fuel-are starting to drive up prices. Moody's Analytics expects headline inflation to edge higher in the second half of the year, partly due to these reforms.

SINGAPORE

Revised first-quarter GDP data is due on Thursday and could be adjusted lower, as manufacturing weakness drags.

Advance estimates showed 1Q GDP growing 3.8% on year, below expectations and slower than 5.0% in 4Q. Singapore's Ministry of Trade and Industry has since trimmed its full-year forecast to 0.0%-2.0% from 1.0%-3.0%.

Barclays expects the economy to stabilize in the second half as tariff impacts fade.

Singapore will also release April inflation data on Friday. With price pressures easing, investors are watching for signs that MAS may loosen policy at its July meeting. Core inflation slowed to 0.5% in March from 0.6% in February.

Any references to days are in local times.

source : marketscreener

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Political

President Donald Trump said Iran will face “something bad” if it doesn’t quickly accept a US proposal over its nuclear program, while officials in Tehran called the the US messaging “confusing and contradictory.”

“They have a proposal, more importantly they know they have to move quickly or something bad — something bad’s going to happen,” Trump told reporters aboard Air Force One as he returned to Washington from a visit to the Middle East.

The president didn’t provide details on the proposal, which follows talks led by his special envoy, Steve Witkoff, and mediated by Oman. The most recent session was Sunday.

Iran’s lead negotiator, Foreign Minister Abbas Araghchi, said in a post on X later Friday that the country hasn’t received a written proposal.

“In the meantime, the messaging we — and the world — continue to receive is confusing and contradictory,” he wrote. Earlier, Araghchi had said, “What the parties to the negotiations say in the media is not the same as what they say behind closed doors.”

Araghchi also repeated his insistence that Iran retain some enrichment capacity, which has been a major sticking point. US officials have given conflicting messages on the levels of uranium enrichment they would accept.

Trump has repeatedly threatened military action against Iran if Tehran doesn’t reach a deal to limit its atomic work in exchange for relief from crippling US sanctions. Iran says its program is peaceful but it’s long faced suspicion that it could be weaponized.

Tehran also sent negotiators to Istanbul on Friday to discuss nuclear issues and sanctions with the European signatories of the 2015 nuclear deal that Trump withdrew from in his first term.

“We will meet again if necessary to continue talks,” Deputy Foreign Minister Kazem Gharibabadi said on X, adding that Iran, the UK, France and Germany were “determined to sustain and make the best use of diplomacy.”

During his Mideast visit, Trump suggested that the US is moving closer to an agreement to curb Iran’s nuclear activities even as he has sought to ramp up pressure on the country, warning that his offer will not remain on the table indefinitely.

Source: Bloomberg

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Economic

China–U.S. Trade War

Below are the most important global events likely to affect FX and bond markets in the week starting May 19.

As markets calm after the U.S. and China agreed to slash tariffs for a period of 90 days, focus is set to switch to how tariffs and the uncertainty surrounding them are affecting the global economy. U.S. purchasing managers' index on manufacturing and services activity in May will be closely watched, alongside similar figures from the eurozone and the U.K.

In Europe, investors will be watching trade talks between the European Union and the U.K., alongside data on U.K. inflation.

In Asia, markets will watch for progress in trade talks between the U.S. and other countries in the region, as well as key data from China and a rate announcement by its central bank.

U.S.

Purchasing managers' surveys for May on Thursday will give an up-to-date indication of the health of the U.S. manufacturing and services sectors as tariffs increasingly start to hit companies.

So far, most official U.S. data have suggested that the economy is holding up reasonably well. However, these data are more backward-looking and don't yet properly capture the aftermath of President Trump's announcement of widespread tariffs on April 2. Although many of the very high tariffs have been scaled back, tariffs of 10% or more are still very high by recent historical standards.

"Global activity is still showing resilience including in the U.S. where continued frontloading is supporting the 'hard data,'" analysts at Citi said in a note.

'Soft data', such as activity and confidence surveys, "paint a potentially grimmer picture, particularly in the U.S. where consumer and business confidence are still deteriorating," they said.

Data on real estate activity are also due during the week, including existing home sales on Thursday and new home sales Friday, both for April. Weekly jobless claims will be released Thursday.

The Treasury will sell $16 billion in 20-year bonds on Wednesday and $18 billion in 10-year inflation-protected TIPS on Thursday.

CANADA

Canadian inflation data for April are released Tuesday and could be a key indicator for gauging whether or not the Bank of Canada will cut interest rates at its next meeting in June.

Most expect that rates will continue to be left on hold next month, but recent weak Canadian jobs figures increased the prospect of a cut.

Canadian money markets price a 36% chance that the Bank of Canada will cut interest rates in June, LSEG data show.

EUROZONE

The EU's spring economic forecast on Monday will give an insight on how the Commission sees economic prospects in light of U.S. tariffs.

Later in the week, Thursday's flash estimate purchasing managers' data for France, Germany and the eurozone, as well as Germany's Ifo business climate index, will also be watched closely to gauge how the economy is faring amid the tariffs.

"The discussion about the harmful effects of U.S. tariffs policy has lost some momentum recently," DZ Bank economist Christoph Swonke said in a note. After four consecutive increases in the Ifo business climate index, the improvement is likely to continue in May, he said.

Final eurozone inflation data for April are due Monday. German producer price data for April are released Tuesday, Spanish industrial orders and turnover figures on Wednesday, and the French consumer confidence survey on Friday.

The European Central Bank releases the account of its April meeting on Thursday.

Germany will auction a combined 2 billion euros in 2030- and 2053-dated green Bunds on Tuesday and 4 billion euros in 2035-dated Bunds on Wednesday. On Thursday Spain will have an auction, while France has two, for nominal and inflation-linked bonds, respectively. Among the smaller issuers, Slovakia will hold an auction on Monday and Finland on Tuesday.

U.K.

In a busy week for U.K. data, post-Brexit trade talks between the U.K. and the European Union will attract attention. The U.K. government is hoping to seal a security and defense pact that will deepen ties with the bloc, although reports suggest there are some hurdles regarding the terms of a deal.

Inflation data for April on Wednesday will be the key indicator to watch for. Inflation is expected to rise in April, driven by higher energy prices and increased tax costs for employers coming into force, which could encourage some companies to put up prices.

After recent stronger-than-expected first-quarter gross domestic product data, the figures could further strengthen expectations that rate cuts from the Bank of England will be gradual.

Investec expects annual CPI inflation to rise to 3.3% in April from 2.6% in March. However, this is "largely due to increased utility costs and higher administered prices rather than a persistent increase in price pressures and will not come as a surprise to the Bank of England," Investec economist Lottie Gosling said in a note.

Thursday's flash U.K. purchasing managers' surveys will show how well the services and manufacturing sectors are faring in the wake of U.S. tariffs, even as the U.K. and the U.S. have reached a deal to reduce some of this burden.

Signals of U.K. consumer confidence will be provided by the GfK consumer confidence survey for May and retail sales data for April on Friday. U.K. public finances data for April are released Thursday.

The U.K. plans the syndicated launch of a new January 2056 gilt. It also plans to sell October 2031 gilts via auction on Wednesday.

SCANDINAVIA

Denmark, Norway and Sweden will have bond auctions on Wednesday. Sweden's National Debt Office will publish a borrowing review on Thursday, with expectations of an increase in nominal bond issuance.

AUSTRALIA/NEW ZEALAND

The Reserve Bank of Australia is set to announce its policy decision Tuesday, with strong wage growth dampening hopes for near-term rate cuts.

While robust jobs and wage data have reignited concerns about persistent inflation amid weak productivity growth, some economists still expect the RBA to cut rates in May. Both headline and core inflation are back within the central bank's 2% to 3% target range, though strength in employment may temper the depth of easing later in the year.

Analysts at Nomura remain confident the RBA will opt for a cautious 25-basis-point cut. "The RBA typically provides less forward guidance than some other central banks and will likely regard this approach as especially prudent against the highly uncertain global backdrop," they said. Meanwhile, CBA also expects the central bank to lower the cash rate to 3.85%.

CHINA

A raft of April data will shed light on consumption, property and other key sectors at the start of the second quarter.

China's economic activity likely remained resilient over the month, shrugging off the impact of higher U.S. tariffs, according to a poll of economists by The Wall Street Journal. Industrial production is expected to have grown 7.7% from a year earlier, up from 5.5% in March. Retail sales likely rose 5.9% on year, slightly higher than the growth seen in March. Fixed-asset investment from January to April is expected to have remained in line with the first quarter.

House price and property investment data, also due Monday, may reinforce signs of stabilization in the real estate sector.

While the recovery path remains bumpy, new home prices are expected to stabilize in 2025, according to Morningstar analysts, supported by rounds of policy easing lifting new home sales values and local governments becoming more active in absorbing excess property and land inventory, also a positive for home prices.

"We anticipate more fiscal policies, such as homebuying vouchers and tax credits, to further stimulate nationwide home demand," said analyst Jeff Zhang.

On Tuesday, the People's Bank of China will announce its loan prime rate. Having already cut its key seven-day reverse repo rate earlier this month, policymakers may now pause, particularly after the U.S.-China tariff truce. Markets will also watch for further yuan appreciation.

Foreign direct investment data for April is due later in the week.

JAPAN

Bank of Japan policy board member Asahi Noguchi will meet local leaders in Miyazaki on Thursday. Markets will parse any comments on the bank's rate-hike path, as Japan faces headwinds from U.S. tariffs.

April trade figures are due Wednesday, followed by March machinery orders on Thursday.

April CPI, due Friday, likely ticked higher as energy subsidies faded. Core inflation is expected to have risen 3.4% from a year earlier, up from 3.2% in March, according to a Quick survey.

The BOJ is scheduled to conduct purchases of Japanese government bonds across four maturities on Monday and Friday.

The Ministry of Finance will auction 1 trillion yen of 20-year JGBs on Tuesday-a reopening of the April 2025 issue-and 250 billion yen of 10-year inflation-indexed bonds on Thursday. The longer dated auction may attract insurers and pension funds, while Thursday's could appeal to investors hedging inflation risk.

INDONESIA

Bank Indonesia announces its rate decision Wednesday, with analysts split as policymakers assess currency stability and trade shifts.

Nomura now expects a rate cut, citing easing rupiah volatility following the de-escalation in trade tensions between the U.S. and China. Still, it assigns a 40% probability to a hold, citing lingering global risks.

Barclays economists also noted the central bank's dilemma: "It remains challenging to time future rate cuts due to the importance of the IDR," they said. While they continue to expect the central bank to stay on its easing cycle, the latest trade developments seem to have boosted the dollar, likely reducing BI's ability to opportunistically deliver easing.

THAILAND

Thailand will release its first-quarter GDP on Monday, offering clues on how the economy is holding up amid trade uncertainties. GDP is expected to have risen 2.8% on year, according to the median forecast of 13 economists polled by The Wall Street Journal.

Source: marketscreener

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Commodity

Energy

Oil prices edged up on Friday, heading for a second consecutive weekly gain on easing U.S.-China trade tensions, although gains were held back by expectations of higher supply from Iran and OPEC+.

Brent crude futures were up 97 cents, or 1.5%, at $65.50 per barrel at 01:51 pm ET (1751 GMT), while U.S. West Texas Intermediate crude futures rose 97 cents, or 1.6%, to $62.59.

The benchmarks were headed for a weekly gain of 2.3% and 2.5% respectively.

The contracts fell by more than 2% in the previous session on the prospect of an Iranian nuclear deal, which could result in an easing of sanctions that could see Iranian crude return to the global market.

"Expected increases in OPEC+ oil production along with a more probable Iranian nuclear agreement has re-surfaced the bear trade," said Dennis Kissler, senior vice president of trading at BOK Financial.

"Near term, with geopolitical temperatures cooling, a strong seasonal travel demand will be needed in the coming months to counter the expected rises in supplies," Kissler added.

U.S. President Donald Trump said on Thursday the U.S. was nearing a nuclear deal with Iran, with Tehran "sort of" agreeing to its terms. However, a source familiar with the talks said there were still issues to resolve.

ING analysts wrote in a note that a nuclear deal lifting sanctions would allow Iran to increase oil output, resulting in additional supply of around 400,000 barrels per day.

Investor sentiment was boosted this week by the U.S. and China, the world's two biggest oil consumers and economies, agreeing to a 90-day pause on their trade war during which both sides would sharply lower trade duties.

The hefty reciprocal tariffs had raised concern about a sharp blow to global growth and oil demand.

Analysts at BMI, a unit of Fitch Solutions, said in a research report, however, that "while the 90-day cooling off period leaves the door open for additional progress on lowering trade barriers on both sides, the uncertainty on longer-term trade policy will limit price upside."

Keeping a lid on supply additions, Kyiv and Moscow failed to agree to a ceasefire at their first direct talks in more than three years, with Russia presenting conditions that a Ukrainian source described as "non-starters".

Israel struck Yemen's Red Sea ports of Hodeidah and Salif on Friday, continuing its campaign to degrade Houthi military capabilities.

On the U.S. supply side, oil rigs fell by 1 to 473 this week, their lowest since January, energy services firm Baker Hughes (BKR.O) said in its closely followed report on Friday.