Moody's cuts US sovereign credit rating

Moody’s credit rating agency on Friday downgraded US debt by one notch, reducing the rating to Aa1 from Aaa. Lack of action on US debt and deficits were cited as the reason for the reduction, with the move bringing Moody’s into line with other major rating agencies.

The preliminary University of Michigan sentiment survey declined for a fifth consecutive month in May, falling to a value of 50.8 from 52.2 in April. There were falls in both the current and expectations sub-components on the month. The decline appears to have been driven by concerns about tariffs, with nearly three-quarters of respondents mentioning them during the survey. Given the de-escalation in US-China trade tensions mid-way through the month, the final print may well be revised upwards.

Household inflation expectations rose in the May University of Michigan sentiment survey. Expectations for one-year ahead inflation expectations rose sharply, jumping to 7.3% from 6.7% in April. Longer-term (5-10 yr ahead) inflation expectations also rose, albeit more modestly, increasing to 4.6% from 4.4%.

Raphael Bostic, President of the Atlanta Fed, suggested during an interview aired on Friday, that he expects just one rate cut in 2025. Bostic anticipates that US economic growth will slow in 2025, due increased uncertainty and the impact of tariffs, but not fall into recession territory.

China industrial production rose 6.1% y/y in April, down sharply from the 7.7% expansion seen in March. Retail sales also slowed to 5.1%, from 5.9% y/y in March. The slower pace of growth in both metrics was likely driven by tariffs, which have since been temporarily reduced.

Today’s Economic Data and Events

• 13:00 EC CPI core (Apr F): forecast 2.7% y/y
• 18:00 US Conference Board leading index (Apr): forecast -0.8% m/m

Fixed Income

• US Treasury yields rose higher in afternoon trade on Friday, as Moody’s downgraded US debt. The 2yr UST rose 4bps to reach 3.999% while the 10yr yield gained 5bps to 4.477%. On a week-on-week basis yields have risen, increasing 11bps and 10bps on 2yr and 10yr Treasuries, respectively, in part as traders repriced US recession odds on the back of ebbing US-China trade tensions.
• Yields were broadly lower across major European markets on the day. The 10yr Gilt yield fell 1bps to 4.6478%, while the 10yr Bund yield declined by 3bps to 2.589%.

FX

• The US dollar rose on Friday, with the spot index gaining 0.2%. EURUSD declined 0.2% to 1.1163, while GBPUSD fell 0.17% to 1.3283. USDJPY saw a marginal 0.02% gain on the day, to leave it broadly unchanged at 145.7. On a week-on-week basis the dollar spot remained almost 0.7% weaker.
• Moves in commodity currencies were muted on Friday. USDCAD fell 0.07% to 1.3969, while NZDUSD gained 0.7% to 0.5881. AUDUSD ended the day unchanged at 0.6406.

Equities

• US equity markets rose on Friday, buoyed by big-tech stocks. The Dow Jones rose 0.78%, the S&P 500 gained 0.7% and the NASDAQ increased 0.5%. Friday’s performance topped off a strong week, with the indices rising 3.4%, 5.3% and 7.2% on a week-on-week basis, respectively.
• European markets also saw gains on the day. The Eurostoxx 50 rose 0.3%, the FTSE 100 increased 0.6%, the CAC 40 gained 0.4% and the DAX rose 0.3%.
• Local markets were also stronger on Friday with the DFM 1.1% higher, while the ADX added 0.4%.

Commodities

• Oil prices rose on Friday, after Iranian negotiators cast doubt on President Trump’s claims of progress in talks. Brent futures gained 1.36% to USD 65.41/b while WTI increased by 1.4% to USD 62.49/b.