At the critical moment when the Republican Party is promoting Trump's "Beautiful Bill",Moody'sDowngrade of U.S. credit rating, coincidence or deliberate?
After the U.S. stock market closed on Friday (May 16), Moody's Ratings announced that it would downgrade the U.S. credit rating from the highest level Aaa to Aa1. After this downgrade, the United States, the world's largest economy, has been downgraded below the highest rating AAA by all three major rating agencies.
The timing of Moody's downgrade is particularly sensitive, because earlier in the day, Trump's large-scale tax reform plan failed to be passed due to the obstruction of hardline Republicans within the Budget Committee of the U.S. House of Representatives. As market participants commented:
The timing was exceptional as the GOP tried to get Trump's "Big Beautiful Bill" through committee … As we all know, there is no such thing as coincidence in Washington.
Interestingly, in 2012, Trump tweeted to predict that the credit rating of the United States would be downgraded again as a criticism of then President Obama. However, in the end, the rating agency didn't actually "do it", but now when he was president, his rating was really downgraded, which was regarded as being "severely beaten in the face".
After Moody's announced the downgrade, the market reacted immediately, with major U.S. stock index futures falling and Treasury Bond yields climbing. Strategists on Wall Street generally believe that this downgrade is not surprising, but it will further dampen market confidence and may trigger a correction in stocks.
The timing of downgrade is delicate
According to reports, just hours before Moody's announced the downgrade, the blocking action led by hardline Republicans caused Trump's tax reform bill to fail to pass the House Budget Committee.As mentioned earlier on Wall Street, the Budget Committee of the U.S. House of Representatives rejected the Republican Party's large-scale tax and spending bill with 21 votes against and 16 votes in favor. In this vote, four Republican hardline representatives-Reps. Chip Roy, Ralph Norman, Josh Brecheen and Andrew Clyde joined the Democratic camp and voted against the bill proposed by the Republican Party.
These hardline lawmakers threatened to refuse to support the above bill unless House Speaker Johnson, who is also a Republican, agreed to further cut Medicaid, a medical aid program for low-income American nationals, and completely abolish the green energy tax cuts implemented by the Democratic Party.
This bill aims to extend the tax cuts introduced by the Trump administration in 2017, known as the "The One, Big, Beautiful Bill", but the bipartisan tax committee of Congress estimates that the bill will increase the deficit by $3.72 trillion in ten years.
It is worth noting that Moody's warned in its downgrade statement that if Trump's tax reform bill continues, it will add about $4 trillion to the structural deficit of the United States in the next decade. The statement also specifically mentioned:
"Several U.S. administrations and Congress have been unable to agree on measures to reduce the annual fiscal deficit and interest spending, and do not believe that the fiscal package currently under discussion can achieve substantial reductions in mandatory spending and deficits for many years to come."
Moody's also pointed out in the statement that the ratio of U.S. government debt to interest payments has continued to rise in the past decade or so, and is now much higher than that of other sovereign countries of the same level. It is predicted that by 2035, federal interest expenses will account for about 30% of fiscal revenue, significantly higher than 18% in 2024 and 9% in 2021.
Wall Street: This gives US stocks a reason to pull back
DespiteS&P 500Indices have rebounded from last month's trough and have recouped ground lost during the year, but many on Wall Street are skeptical of the rise as the impact of tariffs on business and consumer confidence is likely to show up in economic data in the coming months.Moody's's move further exacerbated the complex risks faced by the U.S. market. Wall Street analysts pointed out that this actually gave U.S. stocks a reason for a correction.
JPMorgan ChaseMarko Kolanovic, former chief strategist and co-head of global research, posted on social media:
During the U.S. debt rating downgrade in August 2011,S&P 500 Index ETFDown ~ 10%, 20-year U.S. Treasury ETF up ~ 10% (first 2 weeks of August), of course other things happened, but for those who didn't get into the market in August 2011, that's a general direction.
Eric Beiley, executive director of wealth management at Steward Partners, said:
"This is a warning sign. U.S. stocks are about to hit a ceiling after a welcome rally. Moody's credit rating downgrade may prompt money managers to take profits after a sharp rally in stocks over the past month."
Max Gokhman, deputy chief investment officer at Franklin Templeton Investment Solutions, warns:
"Treasury Bond's downgrade is not surprising in the face of relentless unfunded fiscal spending, and this spending will only accelerate with the current plans of Congress. Moreover, debt service costs will continue to climb as large investors, both sovereign and institutional, begin to gradually swap U.S. Treasury Bond for other safe-haven assets. Unfortunately, this could exacerbate the pressure on U.S. debt, put further downward pressure on the dollar and make U.S. equities less attractive. "
For his part, Ivan Feinseth, chief investment officer at Tigress Financial Partners, highlighted the potential global impact:
"U.S. Treasury Bond is considered the safest investment in the world. When the U.S. credit rating is downgraded, the shock may have a more negative impact on other countries' sovereign debt. It remains to be seen how this will affect stock markets in the coming weeks, but caution is likely to emerge after the recent strong rally in stocks."
Michael O 'Rourke, chief market strategist at JonesTrading, believes the market reaction may be similar to the situation when S&P downgraded the U.S. rating in 2011:
"I expect the stock market to experience a round of profit-taking after a strong rebound. When S&P downgraded the United States in 2011, the U.S. Treasury Bond initially fell, but then there was a safe-haven buying, which eventually rebounded."
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