Markets pull back as Moody’s downgrades US credit

Global markets began the week on a cautious note after Moody’s downgraded the United States’ sovereign credit rating from Aaa to Aa1, citing rising fiscal deficits and a deteriorating political environment for fiscal reforms. The move, while symbolic for some, reignited broader concerns about long-term debt sustainability and the outlook for US assets.

US equity futures dropped, with S&P 500 and Nasdaq 100 contracts falling by 1.1% and 1.3%, respectively. At the same time, the 10-year Treasury yield climbed to 4.50%, and 30-year yields briefly hit 5.00%, before easing slightly. The dollar weakened 0.2%, while gold rose 0.4% as safe-haven demand picked up. European futures remained relatively flat, and Asian equities traded mixed, with China and Japan lagging.

The downgrade, coming after similar actions by Fitch and S&P, reflects deeper anxieties over America’s ballooning debt and growing deficit. The cut follows Congressional debates over unfunded tax cuts and new spending proposals, including Medicaid changes tied to Trump’s latest fiscal package. Analysts caution that the timing—paired with already fragile market sentiment—could amplify volatility in coming weeks.

Fiscal warning meets trade fragility

Treasury Secretary Scott Bessent attempted to downplay the downgrade’s significance, noting that the administration remains committed to curbing federal spending. Yet concerns are mounting, especially as trade policy disruptions, tariff uncertainty, and global supply chain pressures continue to buffet economic forecasts.

Fed Governor Michael Barr acknowledged solid growth and disinflation progress but warned of potential shocks from supply-chain disruptions tied to tariffs, particularly for small businesses. “Disruptions can have large and lasting effects,” Barr said, flagging the risk of persistent inflation alongside weaker output.

Global equities had been on a strong rebound following easing trade tensions between the US and China. But as Moody’s downgrade revived the “Sell America” narrative, investors are recalibrating expectations for the second half of 2025.

Mixed data from China, more expected this week

China’s latest figures offered a fragmented view of recovery. Industrial output grew faster than expected, yet retail sales and fixed asset investment disappointed, suggesting the post-tariff bounce may be uneven. Notably, China also reduced its holdings of US Treasuries, while the UK has now become the second-largest foreign holder.

Meanwhile, Japan’s economy contracted for the first time in a year, highlighting vulnerability to trade headwinds. The yen gained modestly, while attention turns to BoJ Board Member Toyoaki Nakamura’s speech and Friday’s CPI release.

RBA decision, inflation data in focus

The Reserve Bank of Australia is widely expected to deliver a 25bps rate cut, lowering the cash rate to 3.85%. But there’s divergence among major banks: NAB anticipates a bolder 50bps move, and some project further cuts through year-end as global headwinds continue. Analysts agree that uncertainty around China and trade negotiations leaves the RBA’s path fluid.

On the inflation front, markets are watching for CPI releases from Canada, the UK, and Japan:

Canada’s CPI could be distorted by the removal of the carbon tax on energy. Focus will fall on core components to assess whether a June rate cut by the BoC remains likely.

UK CPI is expected to rebound above 3%, driven by energy and regulated costs. However, the BoE has already flagged this as a temporary blip, and markets expect the central bank to maintain a gradual easing path.

Japan’s CPI may strengthen slightly after a weak Q1 GDP, but unless inflation surprises significantly to the upside, the BoJ is likely to stay on hold, prioritizing stability over normalization.

Data-heavy calendar to drive volatility

Beyond inflation, the week is packed with key data:

Retail sales from the UK, Canada, and New Zealand will gauge consumer resilience amid growing tariff burdens.

Germany’s Ifo Business Climate will offer insight into sentiment on the continent.

The ECB minutes could provide additional clues about the June rate cut widely expected by markets.

Key Events This Week:

• Tuesday: RBA rate decision, Canada CPI, China rate decision
• Wednesday: UK CPI, Japan and New Zealand trade data
• Thursday: PMIs from Eurozone, Japan, UK, and US; ECB accounts; Germany Ifo
• Friday: Japan CPI, UK retail sales, Germany GDP final, US new home sales