US stocks rally amid tariff relief and inflation optimism
United States (US) stock markets finished last week on a high note after the US and China agreed to significantly roll back tariffs for 90 days. Cooler-than-expected consumer price index (CPI) and producer price index (PPI) data reinforced expectations for potential Federal Reserve (Fed) interest rate cuts later this year.
Over the week, the US Tech 100 (Nasdaq 100) surged 6.97%. The US 500 (S&P 500) gained 5.27%. TheWall Street (Dow Jones) added 1405 points, or 3.4%.
Moody’s downgrades US credit rating
Late on Friday, Moody’s downgraded the US credit rating to ‘Aa1’ from ‘Aaa’, citing the government’s rising debt levels. The downgrade comes as Congress progresses President Trump’s tax bill. This legislation includes permanent tax rate reductions and temporarily eliminates taxes on tips and overtime. while increasing the debt ceiling by $4 trillion.
Moody’s is the last of the big three rating agencies to downgrade the US after Standard and Poor’s in 2011 (from AAA to AA+) and Fitch in August 2023 (from AAA to AA+).
Market reaction and economic insights
The fallout has resulted in risk aversion flows to start the new week:
- US 500 futures have tumbled 0.75% to 5931
- US Tech 100 futures are trading 1.07% lower at 21,280
In the fixed income market, yields from the middle to the long end of the US rates curve are pushing higher, flashing warning signals:
- The yield on the 10-year is up 4 basis points (bp) to 4.49%
- The yield on the 30-year is trading 6 bp higher at 4.97% – eyeing the year-to-date 5.02% high.
Trade announcements on the horizon
Looking ahead, President Trump has said he plans to announce tariff rates for US trading partners within the next two to three weeks, while indicating that the US and European Union (EU) have initiated ‘serious trade talks.’ Meanwhile, US and Japanese finance ministers are scheduled to meet this week to continue trade discussions, which appeared to have stalled.
On the data front, flash purchasing managers’ index (PMI) readings will be watched for insights into economic uncertainties and potential tariff-related price pressures, although given last week’s rollback in tariffs, these readings will likely be considered outdated.
Earnings reports from Target, Home Depot, and Lowe’s will be in focus after Walmart’s warning last week about potential price hikes due to high tariffs.