Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 19/05/25
The failure to halt widening budget deficits prompted the Moody’s rating agency to downgrade the US sovereign debt from Aaa, to Aa1
Investors’ risk appetite improved in the past week due to optimism regarding the prospect of less disruptions in international trade.
US bourses rallied, with the S&P500 up by +5.3% wow, led by Information Technology (+8.1% wow). The latter was also boosted by important strategic partnerships being announced between semiconductor developers (most notably NVIDIA, the stock price of which surged by +16.1% wow) and HUMAIN, an AI value chain subsidiary of Saudi Arabia’s Public Investment Fund.
Improved sentiment was challenged initially on May 19th, after Moody’s downgraded on Friday 16th the US government’s rating by one notch, to Aa1 with a stable outlook from Aaa with a negative outlook previously. As a result, Moody’s joined S&P Global and Fitch in assigning the second highest grade. The downgrade acted as a stark reminder of the profound US fiscal challenges.
US Treasury bond yields initially edged higher on Monday, by +10 bps to +12 bps, at their highest in 3 (10-year yield) to 4 months (30-year), reversing though back towards their Friday levels. In the past week, yields had modestly risen by c. +5 bps wow, albeit due to improved optimism of US economic activity prospects following the aforementioned trade deals.
The downgrade came due to the substantial debt increase in the past decade, with the US federal government debt at 98% of US GDP in fiscal year 2024, versus 73% ten years ago, as well as due to elevated interest payments (3.1% of GDP versus 1.3% ten years ago) that are meaningfully higher than similarly rated sovereigns.
Moody’s expects the deficit to widen further by 2035 from -6.4% in fiscal year 2024, driven by higher interest payments and mandatory spending as well as low revenue generation. Recall that the aforementioned deficit in 2024 is already particularly wide (mean value of -3.2% since 1962), with the path so far in fiscal year 2025 alarming.
In all, the federal debt is projected by Moody’s to reach 134% of GDP by 2035 in the baseline scenario, which considers fiscal proposals currently under consideration in the US legislature. In the event, the major tax bill under consideration has made its way to the main floor of the House of Representatives. Although the bill is set to undergo changes before it is finalized and passed into law, in its current form it points to deficit increases instead of fiscal consolidation.
Notably, making permanent the tax cut provisions of the 2017 Tax Cuts and Jobs Act alone, most of which are set to expire by end-2025, is estimated to lead to an extra deficit accumulation of c. $4 tn by 2035. Overall cost-increasing measures are estimated at c. $5 tn in the next 10 years, only partially counteracted by savings of $2.7 tn, thus leaving a net deficit increase of $2.3 tn (c. 8% of 2024 GDP).
Meanwhile, the European Union and the United Kingdom reached a deal on Monday May 19th, concerning a wide array of their bilateral relationship, from the highly contentious issue of North Sea fishing access to trade and people’s mobility issues. Both the euro and the British Pound were gaining ground on Monday 19th, by +0.9% to EUR/USD 1.125 and by +0.8% to GBP/USD 1.34 against the US Dollar, respectively.
Investors’ risk appetite improved in the past week due to optimism regarding the prospect of less disruptions in international trade.
US bourses rallied, with the S&P500 up by +5.3% wow, led by Information Technology (+8.1% wow). The latter was also boosted by important strategic partnerships being announced between semiconductor developers (most notably NVIDIA, the stock price of which surged by +16.1% wow) and HUMAIN, an AI value chain subsidiary of Saudi Arabia’s Public Investment Fund.
Improved sentiment was challenged initially on May 19th, after Moody’s downgraded on Friday 16th the US government’s rating by one notch, to Aa1 with a stable outlook from Aaa with a negative outlook previously. As a result, Moody’s joined S&P Global and Fitch in assigning the second highest grade. The downgrade acted as a stark reminder of the profound US fiscal challenges.
US Treasury bond yields initially edged higher on Monday, by +10 bps to +12 bps, at their highest in 3 (10-year yield) to 4 months (30-year), reversing though back towards their Friday levels. In the past week, yields had modestly risen by c. +5 bps wow, albeit due to improved optimism of US economic activity prospects following the aforementioned trade deals.
The downgrade came due to the substantial debt increase in the past decade, with the US federal government debt at 98% of US GDP in fiscal year 2024, versus 73% ten years ago, as well as due to elevated interest payments (3.1% of GDP versus 1.3% ten years ago) that are meaningfully higher than similarly rated sovereigns.
Moody’s expects the deficit to widen further by 2035 from -6.4% in fiscal year 2024, driven by higher interest payments and mandatory spending as well as low revenue generation. Recall that the aforementioned deficit in 2024 is already particularly wide (mean value of -3.2% since 1962), with the path so far in fiscal year 2025 alarming.
In all, the federal debt is projected by Moody’s to reach 134% of GDP by 2035 in the baseline scenario, which considers fiscal proposals currently under consideration in the US legislature. In the event, the major tax bill under consideration has made its way to the main floor of the House of Representatives. Although the bill is set to undergo changes before it is finalized and passed into law, in its current form it points to deficit increases instead of fiscal consolidation.
Notably, making permanent the tax cut provisions of the 2017 Tax Cuts and Jobs Act alone, most of which are set to expire by end-2025, is estimated to lead to an extra deficit accumulation of c. $4 tn by 2035. Overall cost-increasing measures are estimated at c. $5 tn in the next 10 years, only partially counteracted by savings of $2.7 tn, thus leaving a net deficit increase of $2.3 tn (c. 8% of 2024 GDP).
Meanwhile, the European Union and the United Kingdom reached a deal on Monday May 19th, concerning a wide array of their bilateral relationship, from the highly contentious issue of North Sea fishing access to trade and people’s mobility issues. Both the euro and the British Pound were gaining ground on Monday 19th, by +0.9% to EUR/USD 1.125 and by +0.8% to GBP/USD 1.34 against the US Dollar, respectively.