Daily Market Commentary 3rd August 2023

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The ratings agency Fitch downgraded the US Credit Rating from AAA to AA+. This has not happened, from any of the ratings agencies,   since 2011 and is a big deal. There were robust denials that this had any meaning, from the effected Government agencies and large US Banks, but it is of major significance. The downgrade was due to the deteriorating fiscal position of the US and long-term debt. This is a canary in the coal-mine and a serious wake up call for the US lawmakers. US equity markets tumbled and US Bond Yields popped higher, with the 10-year breaking above 4.1%. This was not assisted by yet another strong ADP Private Sector Jobs report. The non-farm Private sector in the US added 324,000 new jobs, which follows last months 455,000 new jobs added. This is not what the Fed would like to see. They want to see a cooling labour market, which would allow inflationary pressures to fall and ease pressure on the Fed, for further rate rises. The US Dollar continued to rise, with the EUR falling to 1.0940, while the GBP dropped to 1.2720.

The US down-grade and surge in the US Dollar was not good news for commodity currencies, with the AUD crashing to 0.6530, while the NZD slumped to 0.6070. The latest employment numbers, from NZ, saw a jump in unemployment to 3.6%. This remains relatively low, but with the projected steep increase in immigration and worsening economic conditions, it is expected to rise quickly. This is bad news for the economy, but good news for the RBNZ, who want the labour markets to cool inflationary pressures. This will ease upward pressure on interest rates and the NZD. The Fitch downgrade and the implications will continue to be digested by markets, while international attention will turn to Non-Farm Payrolls and the Bank of England rate decision.

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