The outlook for the U.S. economy remains uncertain | Forexlive

The outlook for the U.S. economy remains uncertain | Forexlive

Time Stamp: September 7, 2023 5:01 PM
Source Node: 2258360

Despite
the late-month rebound, which was oddly supported by pessimistic data from the
United States, the stock market indexes ended August in the red: the S&P
500 fell by 1.52%, the Nasdaq by 1.58%, the Dow Jones by 2.62%, while the
Russell 2000 declined by 4.49%.

Turning
to the fixed-income market, 10-year Treasury yields in the U.S. and Europe
corrected from mid-month levels of +10% to +3.23% and +0.33%, respectively. In
addition, the Dollar Index rose by 1.47%, while EURUSD
fell by 1.37%. It’s not dramatic, but at least some movement.

What
or who is to blame for a short-lived market change?

Considering
the rise in assets since the beginning of the year, the groundwork for the
correction had already been laid. All that was needed was a catalyst, which the
rating agencies provided. First, analysts at Fitch downgraded the U.S. credit
rating from AAA to AA+.

Subsequently,
Moody’s downgraded ten U.S. banks with a delay of several
months and placed giants such as U.S. Bancorp and Truist on review. S&P
Global Rating followed suit with several regional banks in the country. Well,
better late than never.

To
provide some context, the downgrade in the first case was due to expectations
of worsening financial conditions over the next three years, the country’s
growing national debt, and budget deficits.

In
other words, the wave of problems will not dissipate soon.

As for
the banking sector, the sharp rise in interest rates is putting pressure on
many banks’ funding, liquidity, and profits. These factors have also
contributed to the devaluation of bank assets and an increased risk of
deteriorating asset quality.

Finally,
the decline in savings has had repercussions. Over the past two years,
total reserves in the United States have plummeted from $2.1 trillion in August
2021 to less than $200 billion. Simultaneously, household credit card debt
continues to rise, accompanied by increased delinquencies.

However,
not all pessimism has been detrimental to the markets.The decline in the
number of U.S. job openings in July to a 28-month low of 8.827 million, down
from 9.165 million in the previous month, and the downward revision of GDP to
2.1% from the previous 2.4% in the second quarter, have indeed encouraged
investors.

This
is due to the expectation that slowing economic growth will first impact
consumer demand and subsequently affect inflation. As a result, it is assumed
that the Federal Reserve will no longer need to raise interest rates.

Raphael
Bostic, the president of the Federal Reserve Bank of Atlanta, has expressed
opposition to further interest rate hikes in the United States, stating that
monetary policy is already sufficiently restrictive to bring inflation down to
2% within a “reasonable” timeframe.

No one
seems to consider that, even if monetary policy tightening ends, there is
little reason for optimism. Interest rates will remain high until the middle of
next year, while consumption could slow down due to the economic slowdown.

Keep
in mind that monetary policy operates with a long and variable lag. Analysts
believe that since the Fed began tightening policy just over a year ago, the
effects of the 525 basis point rate hikes may still take some time to manifest
themselves in the economy and markets fully.

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