Moody's has downgraded the US's long-term credit rating to Aa1 trom Aaa. The move may not have been fully expected today. But it was the last holdout among they S&P and Fitch to demote the USA from the top rating, and they placed negative outlook on the US last year (now stable). Fiscal deterioration, both past and anticipated as Congress wrangles with the Republican fiscal bill, is cited as the key factor. From the release (link):
“While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics."
"This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns...We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."
"If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade. As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation."
"We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024."
"Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns."
The House Budget Committee has voted 16-21 on the Republican 'One Big Beautiful' reconciliation bill, with five hardline Republican conservatives joining Democrats to vote against advancing the package. The failed vote means that House Speaker Mike Johnson (R-LA) and Budget Committee Chair Jodey Arrington (R-TX) must decide whether there is a pathway to holding a second vote today. Arrington noted at the end of the hearing: "I do not anticipate us coming back today."
Bloomberg reports that the Fed is planning to shrink its workforce by about 10% over the next several years according to people familiar with the plans. It’s said to mainly do so through attrition but some employees will be offered a deferred resignation program. Eligible workers would be employees across the Federal Reserve system, including the Board of Governors in Washington and the Fed’s 12 regional reserve banks.
European Commission President Ursula von der Leyen has stated at a Ukraine-focused meeting of European leaders – including Ukrainian President Volodymyr Zelenskyy - in Albania that the EU's next package of sanctions against Russia will include, “more sanctions on Russia’s financial sector”, as well as hitting its hydrocarbon sector. Von der Leyen’s comments came shortly before reports that Russia-Ukraine talks in Istanbul concluded after around two hours of discussions between mid-level delegations.
Treasuries look to finish mostly higher late Friday, off early highs post data, curves flatter (2s10s -1.767 at 44.884) as short end underperforms.
Treasury futures dipped briefly after Import/Export prices come out slightly higher than expected, Housing Starts & Building Permits data mixed - the former higher but slightly less than estimated, build permits decline and are lower than estimated.
Rates continued to pare gains after lower than expected UofM sentiment and expectations data, while 1Y &5-10Y inflation exp rise - higher than expected.
Consumer sentiment fell to the 2nd-lowest ever reading of 50.8 (53.4 survey, 52.2 prior), as both current conditions (57.6 vs 59.9 survey, 59.8 prior) expectations receded further (46.5 vs 48.6 survey, 47.3 prior).
Inflation expectations soared in the preliminary UMichigan survey for May, with the 1-year measure up to 7.3% from 6.5% prior, and long-run up to 4.6% from 4.4% prior. Those were respectively the highest since 1981 and 1991 and well above consensus expectations that those measures would remain steady (at 6.5% / 4.4%).
Tsy Jun25 10Y futures currently trade +3.5 at 110-11.5 vs. 110-21.5 high, initial technical resistance at 110-27 (20-day EMA). Key near-term resistance has been defined at 111-22, the May 7 high. A move above this level is required to signal a potential reversal.
Cross asset roundup: Bbg US$ index off midday highs to 1231.97 (+1.95), Gold weaker but off lows at 3194.90, crude firmer (WTI +.77 at 62.39).
Inflation expectations soared in the preliminary UMichigan survey for May, with the 1-year measure up to 7.3% from 6.5% prior, and long-run up to 4.6% from 4.4% prior. Those were respectively the highest since 1981 and 1991 and well above consensus expectations that those measures would remain steady (at 6.5% / 4.4%).
While the partisan political split on inflation expectations continued, it's notable that Republican inflation expectations continue to tick up from recent lows - as the survey report puts it, "This month’s rise was seen among Democrats and Republicans alike. Long-run inflation expectations lifted from 4.4% in April to 4.6% in May, reflecting a particularly large monthly jump among Republicans." See chart below.
Unsurprisingly, "Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60% in April; uncertainty over trade policy continues to dominate consumers’ thinking about the economy." That included "nearly two-thirds of Republicans", per the report.
Against this backdrop, consumer sentiment unexpectedly fell, to the 2nd-lowest ever reading of 50.8 (53.4 survey, 52.2 prior), as both current conditions (57.6 vs 59.9 survey, 59.8 prior) expectations receded further (46.5 vs 48.6 survey, 47.3 prior). More on this shortly.
An important caveat from the UMichigan survey however is the survey period, though it's unclear whether made a huge difference: "Note that interviews for this release were conducted between April 22 and May 13, closing two days after the announcement of a pause on some tariffs on imports from China. Many survey measures showed some signs of improvement following the temporary reduction of China tariffs, but these initial upticks were too small to alter the overall picture – consumers continue to express somber views about the economy."
The sharp drop in consumer confidence in the preliminary UMichigan survey for May was broad-based. This is "soft" data that may not ultimately translate into actual consumer behavior (the "hard" data so far remains relatively resilient), and the readings could improve in the final report post-US/China tariff war climbdown, but the details are undeniably negative.
As noted earlier, consumer sentiment fell to the 2nd-lowest ever reading of 50.8 (53.4 survey, 52.2 prior), as both current conditions (57.6 vs 59.9 survey, 59.8 prior) expectations receded further (46.5 vs 48.6 survey, 47.3 prior). The declines in these aggregates are more incremental than dramatic at this point after their collapse in previous months, but the lack of improvement is notable.
It's difficult to find any mitigating factors in the survey details either, with tariffs heavily impacting sentiment in a negative direction (and the deterioration in sentiment for Republicans was greater than for for Democrats and Independents in this report, so it isn't simply a partisan development).
Respondents' expectations of household income changes / higher real income over the next year hit new lows, reflecting not just pessimism on personal financial situations in nominal but also in real terms. Current assessments of personal finances fell nearly 10%. For the 2nd consecutive month, 65% of respondents said they expect higher unemployment in the next year, but that also extended to their own personal situation - with expectation of personal job losses over the next 5 years, remaining around the highest levels of the pandemic.
April's New Residential Construction report pointed to weakening residential investment activity ahead.
Starts came in largely in line at 1,361k (1,364k survey), up from 1,339k (upward rev from 1,324k) prior. Permits however fell more than anticipated, to 1,412k (1,450k survey) from 1,481k prior (upward rev from 1,467k).
Looking under the hood, the dynamics in housing starts were divergent. Single-family fell for the 3rd month in 4 to a 9-month low and the 2nd lowest in the last 24 months (927k), though multifamily starts picked up sharply to a 5-month high and 2nd- highest in the last 17 months.
But the weakness in permits - the more meaningful forward-looking indicator - was significant. They fell the most M/M in 13 months (-4.7%), to the lowest in 11 months and the 2nd lowest in the last 28 months. And single-family and multi-family starts both fell: the former to a 23-month low (922k, down 5.1% for the biggest drop in 28 months), while the latter fell more modestly (by 3.7%) to 490k.
The drop in permits was overwhelmingly driven by a 9.6% collapse in South region permits, the biggest fall in 25 months.
Ex-petroleum import prices rose by the most in 12 months in April on a sequential basis, at 0.40% M/M, vs -0.24% prior, and well ahead of the 0.1% expected. However, March's was revised down to -0.24% (0.00% pre-rev), and this is a non-seasonally adjusted series so the Y/Y change actually suggested disinflationary price pressures at 1.3% vs 1.5% prior and well down from 2.3% at the end of 2024.
As such even with the strong M/M reading, the headline figures are ambiguous as to whether this is indicative of a sustained pickup in prices going into the 2nd quarter of the year.
There is a very large caveat here that the import price indices do NOT take account of tariffs (which are considered taxes in the national accounts).
If anything, were exporters to take part of the "hit" of US consumer tariffs, one would expect US import prices to moderate in the quarters ahead, but this would not translate into weaker consumer prices if firms pass along those higher import prices (and vice-versa, with sustained higher import prices suggesting US consumers will be absorbing the hit).Any one month of data should be interpreted with caution.
The higher M/M April PPI could be indicative of stockpiling effects as importers rushed to build supply, among other factors.
The NY Fed's Business Leaders Survey pointed to services sector activity in the region stabilizing at a very weak level in May.
The current General Activity index improved slightly to -16.2 (-19.8 prior which was a 27-month low), with the current business climate index (-51.7, up 9 points) and 6-month expectations for the business climate (up 4.1 points to -45.9) also improving.
But all of the main indices remain in recessionary territory there they have been since March, and 6-month expectations for general activity actually fell further to -28.1 (down 1.5 points).
Price dynamics were mixed: prices paid ticked up 00.9 points to 58.5, remaining around 2-year highs, though prices received receded 5.3 points to 20.7, lowest in 4 months.
Per the report: "Employment held steady, and wage growth slowed. Supply availability worsened significantly. Input price increases remained moderate, while selling price increases slowed somewhat. Firms were again quite negative about the outlook, with nearly half expecting activity to decline in the months ahead."
One major caveat is that survey responses were collected between May 2 and May 9 so will not have taken account of the subsequent US-China trade detente. Either way, it looks like there was a tentative stabilization in the survey in May.
This survey has roughly corresponded with the level of the ISM Services index, suggestive of no further major deterioration in the latter in May (April saw a 0.8 point uptick to 51.6).
MARKETS SNAPSHOT
Key market levels of markets in late NY trade: DJIA up 300.18 points (0.71%) at 42618.26 S&P E-Mini Future up 36.25 points (0.61%) at 5969 Nasdaq up 72.5 points (0.4%) at 19183.56 US 10-Yr yield is up 0.8 bps at 4.4394% US Jun 10-Yr futures are up 2/32 at 110-10 EURUSD down 0.0037 (-0.33%) at 1.115 USDJPY up 0.27 (0.19%) at 145.94 WTI Crude Oil (front-month) up $0.8 (1.3%) at $62.42 Gold is down $46.08 (-1.42%) at $3193.96
European bourses closing levels: EuroStoxx 50 up 15.45 points (0.29%) at 5427.53 FTSE 100 up 50.81 points (0.59%) at 8684.56 German DAX up 71.84 points (0.3%) at 23767.43 French CAC 40 up 33.22 points (0.42%) at 7886.69
US TREASURY FUTURES CLOSE
3M10Y +2.764, 9.087 (L: 0.163 / H: 9.087) 2Y10Y -2.652, 43.999 (L: 43.999 / H: 47.963) 2Y30Y -2.841, 89.335 (L: 89.335 / H: 94.384) 5Y30Y -0.828, 82.118 (L: 82.092 / H: 85.06) Current futures levels: Jun 2-Yr futures down 1.625/32 at 103-9.75 (L: 103-09.625 / H: 103-14.25) Jun 5-Yr futures steady at at 107-21.75 (L: 107-21.75 / H: 107-30.25) Jun 10-Yr futures up 2/32 at 110-10 (L: 110-09.5 / H: 110-21.5) Jun 30-Yr futures up 12/32 at 113-14 (L: 113-08 / H: 114-01) Jun Ultra futures up 16/32 at 116-31 (L: 116-22 / H: 117-24)
RES 2: 111-22 High May 7 and a key near-term resistance
RES 1: 110-27 20-day EMA
PRICE: 110-10 @ 1510 ET May 16
SUP 1: 109-18+ Low May 15
SUP 2: 109-08 Low Apr 11 and key support
SUP 3: 108-26+ 76.4% retracement of the Jan 13 - Apr 7 bull cycle
SUP 4:108-21 Low Feb 19
Treasury futures maintain a bearish tone and the latest bounce is for now, considered corrective. Support at 110-01+, 76.4% of the Apr 11 - May 1 bull leg, has been cleared. The breach exposes a key support at 109-08, the Apr 24 low and a bear trigger. Key near-term resistance has been defined at 111-22, the May 7 high. A move above this level is required to signal a potential reversal. First resistance is at 110-27, the 20-day EMA.
SOFR FUTURES CLOSE
Jun 25 -0.015 at 95.690 Sep 25 -0.045 at 95.895 Dec 25 -0.055 at 96.155 Mar 26 -0.060 at 96.350 Red Pack (Jun 26-Mar 27) -0.045 to -0.005 Green Pack (Jun 27-Mar 28) +0.005 to +0.015 Blue Pack (Jun 28-Mar 29) +0.015 to +0.015 Gold Pack (Jun 29-Mar 30) +0.020 to +0.025
Daily Overnight Bank Funding Rate: 4.33% (+0.00), volume: $294B
FED Reverse Repo Operation
RRP usage rebounds to $136.799B this afternoon from $109.436B yesterday, total number of counterparties at 30. Usage had fallen to $54.772B last Wednesday, April 16 -- lowest level since April 2021. Conversely, usage had surged to the highest level since December 31, 2024 on Monday, March 31: $399.167B.
PIPELINE
No new $Benchmark issuance Friday, $50.125B total for week
European FI concluded a week of two halves with a modest rally Friday, the second consecutive session of gains after three days of losses.
Gains were concentrated in the morning session, with some follow through from Thursday's softly-perceived US data and a key rejection of the 2.70% level in 10Y Bund boosting sentiment.
Global core FI traded heavier in the European afternoon however, with the University of Michigan survey showing US consumer inflation expectations soaring.
In data, the Eurozone posted a record trade surplus in March (largely on US tariff front-running), while final Italian HICP was revised down.
Bunds outperformed Gilts, with the German curve leaning bull steeper from the 5-30Y segment; the UK saw twist flattening. In both cases, the short end underperformed on the curve.
The week saw bear flattening in both the UK (2Y +9.7bp, 10Y +8.2bp) and Germany (2Y+7.0bp, 10Y +2.8bp).
Periphery EGBs traded mixed. Iberian instruments underperformed, with Spanish and Portuguese spreads around 1bp wider to Bunds on the day.
Next week's schedule includes May flash PMI data, UK CPI, and the European Commission's latest economic forecasts.
Closing Yields / 10-Yr EGB Spreads To Germany
Germany: The 2-Yr yield is down 2.5bps at 1.855%, 5-Yr is down 3.5bps at 2.155%, 10-Yr is down 3.2bps at 2.59%, and 30-Yr is down 2.6bps at 3.04%.
UK: The 2-Yr yield is up 1.7bps at 4.005%, 5-Yr is up 0.5bps at 4.146%, 10-Yr is down 1.1bps at 4.649%, and 30-Yr is down 1.6bps at 5.394%.
Italian BTP spread up 0.1bps at 100.6bps / Spanish bond spread up 0.9bps at 62.4bps
Late pressure on treasuries saw the US dollar firm into the close, prompting the USD index to rise back above the 101 handle. The DXY looks to close the week roughly 0.75% in the green.
While USDJPY has had a notable 100 pip bump higher from the overnight lows, it’s EURUSD that has seen a more meaningful adjustment on the session, falling 0.4% to levels around 1.1140 as we approach the close. This leaves the pair within close proximity of its 50-day EMA again, an increasingly significant technical reference of support.
Recent weakness appears corrective and key trend signals continue to highlight an uptrend. A clean break of the 50-day (intersecting at 1.1094) would undermine the uptrend. In similar vein, GBPUSD has slipped back below 1.33 and will look to 1.3140, the May 12 low, as the next notable support.
The Swedish krona is the weakest in G10, falling 0.6% against the dollar. As noted, we haven't seen an obvious driver of today's SEK weakness against the broader G10 basket, although major equity benchmarks falling off the best levels may have weighed at the margin. Riksbank Governor Thedeen reaffirmed his cautious stance on current monetary policy in comments this morning.
On the economic calendar next week, we have China activity data due Monday, before the May RBA decision and Canadian inflation on Tuesday. Later in the week, the focus will turn to flash PMI data from the Eurozone.