Risk appetite in the general marketplace so far this week is still not robust after Moody’s Investor Services downgraded the United States’ long-term credit rating from Aaa to Aa1 on Friday, May 16, citing sustained increases in federal debt and chronic fiscal deficits. The move by Moody’s followed similar moves by Fitch and S&P Global ratings agencies.

I admit that when I saw the news after markets closed on Friday, I did not figure it would be a front-burner markets matter, given the actions already taken by Fitch and S&P Global quite some time ago. While Moody’s debt downgrade of U.S. government debt was not a shocker, it was a stark reminder to the general marketplace that the U.S. has a problematic debt burden. All it would take is a change in global investor perceptions to start the financial market dominos falling.

Keep a Closer Eye on U.S. Treasury Markets

Bond traders, the so-called smartest guys in the room, will be the arbiters on how much U.S. government debt is acceptable. At present, bond traders are not indicating real serious problems with the current U.S. debt load. However, bond traders are implying that there are important financial and economic matters that need addressed. 

These matters include: a global trade war that may have already damaged global economic growth despite recent positive developments on world trade. Problematic price inflation could be around the corner due to reduced global commerce in the past several weeks, prompting product shortages on retailers’ shelves — suggesting higher prices.

Federal Reserve officials watch the U.S. Treasury markets very closely. Treasury traders are presently signaling to the Federal Reserve “not yet” on any U.S. interest rate cuts. The U.S. economy is expanding just enough to keep the Fed standing pat on interest rate cuts — especially with the worrisome element of potentially increasing inflation in the coming few months. Fed officials are going to heed what the bond markets are indicating, despite pressure from President Donald Trump on Fed Chair Jerome Powell to lower interest rates. 

How Moody’s Downgrade Is Impacting Markets and for How Long?

The Moody’s U.S. debt downgrade is near-term bullish for safe-haven gold (GCM25) and silver (SIN25) markets. It’s bearish for the U.S. dollar index ($DXY) and bullish for other major currencies like the Euro (E6M25). The renewed focus on U.S. fiscal and debt problems this week has pressured U.S. stock indexes. And the resulting somewhat elevated risk aversion in the marketplace this week, albeit not real keen, has been negative for the grain and livestock futures markets.

However, it’s likely the Moody’s news will wear off quickly — by the end of this week — and marketplace attention will then be more on inflation worries and the Fed likely standing pat on U.S. interest rates for at least the next few months. The scenario of a less dovish Federal Reserve is a bearish element for gold, silver, and other commodity markets, suggesting less consumer and commercial demand due to higher borrowing costs. It’s also bearish for stock indexes and bond futures prices (rising yields). This scenario should be U.S. dollar-bullish due to U.S. interest rates not coming down. Globally, less dovish central banks may mean less consumer demand across the globe. Don’t be surprised to see the dreaded word “stagflation” pop up more in the marketplace discussion this summer. Stagflation means lower economic growth and rising inflation, which is bearish for most markets.

Tell me what you think. I enjoy feedback from all my valued Barchart readers around the globe! Email me at jim@jimwyckoff.com.