Economists Pan U.S. Debt Rating Downgrade, Robust Private Sector Job Gains Cool

Barry Adams
02 Aug, 2023
New York City

Global markets fell more than 2% after Fitch Ratings lowered its long-term credit rating for the U.S. by one notch. 

Fitch had placed the U.S. debt on its watch list with negative implications but most economists panned the downgrade and added that beyond the shock value of the rating action, financial markets will continue on its path. 

Former U.S. Treasury Secretary Larry Summers labeled Fitch's decision "bizarre and inept" but failed to clarify how long the U.S. can keep adding to its gigantic pile of federal government debt without long term consequences. 

Allianz Chief Economic Advisor Mohamed El-Erian added the reasoning and timing of the rating agency's decision was "perplexing." 

Market indexes are expected to recover from the decline but other longer term factors could also impact market direction.   

Core inflation is still running significantly ahead of the Fed's target rate of 2%, despite the recent cooling of overall inflation. 

The wider acceptance of the soft landing scenario among investors has bolted market indexes to double digit gains and extended nine-month rally but  corporate profits have been mixed and barely meeting lowered expectations. 

In other economic news, the private sector added 324,000 net new jobs in July, the latest survey from ADP said Wednesday. 

Job gains declined from a downwardly revised whopping 455,000 increase in June, but were still significantly ahead of the 189,000 estimated by economists in a survey conducted by Dow Jones. 

Bulk of job additions were in the service sector totaling 303,000, driven by 201,000 leisure and hospitality and 30,000 in information management. 

Investors also reacted to the fresh batch of earnings as the busy of week of releases rolled on. 

AMD, CVS health, Humana, Ferrari, Match. Starbucks and Freshworks were in focus. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 0.7% to 4,541.52 and the Nasdaq Composite declined 1.4% to 14,088.09. 

The yield on 2-year Treasury notes increased to 4.91%, 10-year Treasury notes inched higher to 4.08% and 30-year Treasury bonds edged down to 4.18%. 

Crude oil decreased $0.69 to $80.67 a barrel and natural gas prices decreased 6 cents to $2.49 a thermal unit. 

 

U.S. Stock Movers 

Ferrari NV increased 1.3% to $321.69 after the maker of luxury sports cars lifted its annual outlook and reported better-than-expected quarterly earnings. 

Advanced Micro Devices, Inc decreased 1.1% to $116.30 after the semiconductor chipmaker reported stronger-than-expected sales and earnings in the second quarter but forecasted weaker-than-expected third quarter sales. 

Match Group Inc jumped 1.7% to $47.95 after the online dating site reported strong increase in sales and earnings in the second quarter and forecasted sales are likely to be ahead of market expectations. 

Starbucks Corp increased 0.8% to $102.03 after the coffee chain operator reported higher-than-expected sales in the fiscal third quarter on a sales rebound in China. 

Sales at stores open at least 13 months in China soared 46% from a year ago, after Covid-restrictions ended. 

Revenue in the quarter ending on July 2 rose 12% to $9.2 billion and  the company opened 588 net new stores in the quarter, increasing the worldwide total to 37,000. 

Net earnings attributable to shareholders increased to $1.1 billion from $913 million and diluted earnings per share rose to 99 cents from 79 cents a year ago.