Last week was filled with market-moving news. On Tuesday after market close, Fitch Ratings downgraded its U.S. long-term rating from AAA to AA+.1 On Wednesday, we received a strong ADP National Employment Report and the Treasury refunding showed a significant increase in issuance.2 The fiscal deficit started to worry the bond market, as Treasuries sold off sharply and the yield curve steepened. Thursday brought Apple and Amazon earnings — with Amazon earnings showing consumer demand is strong.3 Friday’s jobs report showed the pace of hiring is slowing while wage pressure persists.4
The market has embraced the soft landing narrative over the last few months, and the risk market has rallied strongly. The risk now is the economy doesn’t slow down enough and inflation remains sticky, which leads to higher Treasury yields. The supply-demand of Treasuries may become challenging over the year. The Treasury supply will increase to approximately $1 trillion from approximately $730 billion for this quarter.5 In the meantime, quantitative tightening continues, and foreign buyers have little incentive to buy U.S. Treasuries due to the inverted yield curve and the strong dollar. It will be interesting to see what yield new buyers will come in at and how the level of Treasury yield will eventually decide the valuation for risk markets.
1Fitch Ratings – Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from 'AAA'; Outlook Stable; 8/1/23
2Fidelity – Munis weaker as investors digest larger supply, economic data, Fitch downgrade; 8/2/23
3CNN Business – Amazon’s stock surges as Q2 earnings show profit and sales jump; 8/3/23
4Reuters – US job growth slowing, but wage gains remain strong; 8/4/23
5Bloomberg – US Treasury Boosts Quarterly Borrowing Estimate to $1 Trillion; 7/31/23
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