ONEY - S&P 500 Dips After U.S. Government Credit Rating Downgrade

2023-08-07 15:23:00 ET

Summary

• The S&P 500 went on to close the week at 4,478.03, down 2.3% from where it ended the previous week.
• Looking further forward, we'll be coming up on another prolonged period where the echo effect will affect the dividend futures-based model's projections in about four weeks, but in the negative direction.
• The Atlanta Fed's GDPNow tool upped its estimate of real GDP growth in 2023-Q3 to +3.9% from the previous week's estimate of +3.5%.

It started off as a quiet trading week.

The S&P 500 ( SP500 ) was trading within six and a half points of its previous week's close during the first two days of the week that was. Then Wednesday, 2 August 2023's news that Fitch Ratings had stripped the U.S. government's AAA credit rating happened. The index went on to close the week at 4,478.03 , down 2.3% from where it ended the previous week.

It could have been worse. Fitch downgraded the U.S. government's credit rating to AA+, just one notch below the AAA level, and there's a lot of lower credit grades it could have assigned. But that was the main market-moving event of the trading week ending on Friday, 4 August 2023.

That negative action puts the trajectory of the S&P 500 nearly on track with where the dividend futures-based model would expect it, provided investors have set their forward-looking attention on either 2023-Q4 or 2024-Q1, the same as they were in the previous week. The latest update to the alternative futures chart shows where things stand.

Looking past this week, it looks to us like the model's projections will be skewed by the echo of past volatility over the next two weeks, which is a consequence of using historic stock prices as the base reference points for making its projections of the future. In this case, we think the model's projections are being skewed higher by the echo effect, where it's much more likely the S&P 500 will range within a few percent of its current level.

Looking further forward, we see we'll be coming up on another prolonged period where the echo effect will affect the dividend futures-based model's projections in about four weeks, but in the negative direction. Because that echo will last more than a few weeks, we'll add a new red zone forecast range to the chart to account for that upcoming echo before we get there.

Here's our summary of the past week's market-moving headlines:

Monday, 31 July 2023

• Signs and portents for the U.S. economy:
  • US banks report tighter credit, weaker loan demand -Fed survey.
  • Analysis-Oil inventory drops set stage for higher prices.
• Fed officials get new worry:
  • Clock on the Fed's 'soft landing' may already be ticking.
• Bigger trouble, stimulus developing in China:
  • Hong Kong quarterly GDP growth slows on sluggish global economy.
  • China dribbles out new hints on stimulus as weak data stokes expectations.
    • China's State Council issues measures to expand consumption.
    • China's biggest cities vow to introduce steps to boost property sector.
• BOJ officials thinking about what they did:
  • Explainer-After surprise tweak, what now for BOJ's yield curve control?
• ECB officials getting results they wanted:
  • Euro zone inflation falls further in comforting sign for ECB.
  • Euro zone pulls out of dip with higher growth than expected.
    • ECB's Lagarde says latest growth data 'encouraging'.
    • Italy GDP unexpectedly shrinks in blow to Meloni.
• Wall St finishes strong month on upbeat company earnings.

Tuesday, 1 August 2023

• Signs and portents for the U.S. economy:
  • Oil prices rise more than 1% after sharp drop in US crude stocks.
  • Fitch cuts US credit rating to AA+; Treasury calls it 'arbitrary'.
    • Instant View: Fitch downgrades U.S. foreign currency ratings to 'AA+' from 'AAA'.
  • US construction spending rises strongly in June.
  • US manufacturing shows signs of stabilizing at lower levels in July, ISM says.
• Fed officials think they can deliver "soft landing" for U.S. economy:
  • US Fed officials see pathway to soft landing.
• Bigger trouble developing in China:
  • China's July factory activity swings back to contraction - Caixin PMI.
    • World factory activity mired in slump as China, growth slowdown take toll.
    • S. Korea July exports fall the most in over 3 years as China sputters.
    • Japan's factory activity falls on soft orders - PMI.
• China keeps incrementally boosting stimulus:
  • China vows lower business financing costs, support for property sector in H2.
  • China pledges financing support for small firms amid weak economic recovery.
• BOJ officials claim they're keeping never-ending stimulus alive:
  • Japan ministers say BOJ's move wasn't shift in monetary easing.
• S&P 500, Nasdaq end lower on first day of August in busy earnings week.

Wednesday, 2 August 2023

• Signs and portents for the U.S. economy:
  • Oil settle lower despite record US crude stock drawdown.
  • U.S. housing availability rate slips in second quarter.
• Bigger stimulus developing in China, but not at city level:
  • China releases package of tax relief measures to support small firms.
    • Factbox-China's measures to support the economy amid faltering recovery.
  • Exclusive-Chinese cities tighten property firms' access to escrow funds-sources.
• BOJ officials keep claiming they're keeping never-ending stimulus alive:
  • BOJ's policy tweak not prelude to exit from ultra-low rates-deputy gov.
  • BOJ debated inflation overshoot risk in June, offering insight into July tweak.
  • BOJ deputy governor dismisses chance of early exit from ultra-easy policy.
• Nasdaq slumps more than 2%, S&P, Dow fall after U.S. rating downgrade, hot jobs data.

Thursday, 3 August 2023

• Signs and portents for the U.S. economy:
  • US productivity surges in second quarter; labor costs growth slows.
  • US factory orders jump in June on transportation equipment demand.
  • US services sector slows in July while prices pick up, ISM survey shows.
  • US layoffs fall to lowest level in nearly a year.
  • Oil rises 2% as Saudi Arabia and Russia keep supplies tight.
  • Fitch downgrades Fannie Mae, Freddie Mac after US rating cut.
    • Fitch downgrade highlights investor worries about US fiscal picture.
• Fed officials hope inflation is going away:
  • Fed's Barkin: Inflation still too high, hopes recent data is 'a sign'.
• BOJ officials have to bail out yen after tweaking never-ending stimulus:
  • BOJ makes bold shift as yen risks grow too big to ignore.
  • Japan's service activity growth softens in July - PMI.
• ECB officials liking having higher interest rates, but bigger trouble developing in Eurozone:
  • ECB's Panetta backs keeping rates high over more hikes.
  • German exports stagnate in June amid weak demand from abroad.
• Wall Street closes near flat as Treasury yields surge; Apple, Amazon to report.
• Apple slips even as Q3 results top estimates, aided by Services strength.
• Amazon jumps after the close as revenue, operating income beat.

Friday, 4 August 2023

• Signs and portents for the U.S. economy:
  • Oil rises for 6th straight week as global supplies tighten.
  • US hiring slowdown may push Fed to forego another rate hike.
  • Fitch US downgrade followed protocols, despite timing questions.
• Bigger trouble developing in China:
  • China's stubborn savers risk precipitating liquidity trap.
  • China's policymakers keep investors waiting, but give liquidity assurance.
• Dow, S&P, and Nasdaq close lower, erasing an earlier market rally.
  • Apple tumbles on worries over iPhone; Wall Street defends.

The CME Group's FedWatch Tool showed little to no change from last week in its projections for the future of how the Fed will set interest rates. It projects no future rate hikes through April 2024, followed by a series of quarter-point rate cuts that will begin as early as 1 May (2024-Q2) and continue at six- to twelve-week intervals through the end of 2024.

The Atlanta Fed's GDPNow tool upped its estimate of real GDP growth in 2023-Q3 to +3.9% from the previous week's estimate of +3.5%.

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