Fitch Ratings Downgrade of U.S. Has Stocks On Track For Lower Open

Market participants were already contending with the nagging notion that the stock market was overbought on a short-term basis and due for a pullback. It didn’t necessarily need another excuse to continue with a consolidation trade, yet Fitch Ratings provided one after Tuesday’s close when it downgraded its U.S. credit rating to AA+ from AAA.

Currently, the S&P 500 futures are down 26 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 122 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are down 147 points and are trading 0.4% below fair value.

The Fitch Ratings downgrade was attributed among other things to expected fiscal deterioration over the next three years, growing government debt, and erosion of governance related to peers. The timing of the downgrade has been called into question by some pundits and it drew a rebuke from Treasury Secretary Yellen, who said she strongly disagrees with the decision, calling it arbitrary and based on outdated data.

Judging by the initial reaction of the Treasury market, it would appear that market participants either agreed with Secretary Yellen or reverted to the 2011 approach following the downgrade by Standard and Poor’s where Treasuries, ironically, were viewed as a safe-haven. The thinking being that the U.S. Treasury market is still the biggest, most liquid government bond market in the world and that, as holder of the world’s reserve currency, the U.S. won’t default on its debt.

The 2-yr note yield, which settled at 4.91% yesterday, and the 10-yr note yield, which settled at 4.05%, traded down to 4.84% and 4.01%, respectively, in overnight action. They have since moved higher to 4.89% and 4.06% for a reason that is easier to comprehend at first blush: the ADP Employment Change Report for July was much stronger than expected.

According to ADP, private-sector payrolls increased by 324,000 in July (Briefing.com consensus 185,000) following a downwardly revised 455,000 (from 497,000) in June. The reversal in yields hasn’t been more extreme for several reasons:

• Market participants are cognizant that the huge gain in June was not corroborated by the June Employment Situation Report, which showed a much smaller 149,000 increase in nonfarm payrolls.
• A large portion of the gains in July came from the leisure/hospitality industry (201,000).
• ADP also reported that job stayers saw their lowest year-over-year pay increase (6.2%) since November 2021.

This report followed on the heels of a huge batch of earnings news, which was overshadowed somewhat by the Fitch Ratings action news. Adv. Micro Devices (AMD), Starbucks (SBUX), CVS Health (CVS), Yum Brands (YUM), Kraft Heinz (KHC), Pinterest (PINS), and DuPont (DD) were among the headliners in a huge show of earnings since yesterday’s close.

Time and space won’t permit coverage of the results here, but Briefing.com’s Earnings Results page will provide the full rundown.

In brief, most reports were better than expected, but, even if Fitch Ratings didn’t catch the market’s headline attention like it did, that might not have mattered in terms of triggering a distinctly bullish bias knowing that a lot of expected good earnings news (in relative and absolute terms) had already been priced into most stocks during the summer rally that has featured a broadening out of the buying interest.

The stock market at this juncture is in store for a negative start, but more germane to investor sentiment is how the market closes today.

Originally Posted August 2, 2023 – Fitch Ratings downgrade of U.S. has stocks on track for lower open