September Week 2, Looking Back and Looking Forward

Credit Ratings Regain Relevance Amid US Downgrade

Credit ratings become relevant again when Fitch downgraded the US, even if US Treasury Secretary Janet Yellen thinks they are "outdated." The surprise move may mean that investors will keep a closer eye on upcoming credit ratings, with Germany and Switzerland’s due for a review next week. We also have key inflation data for the US and China. Markets essentially want to see core CPI in the US fall harder and faster to justify their bets that the Fed are done hiking rates. And we’ll also find out if China’s annual inflation rate falls below zero for the first time in over two years.

Looking Back: Market Reactions to US Credit Downgrade

On September week 2,Fitch ratings agency downgraded their credit rating for the US to AA+, making it the second agency in history for them to remove triple-A status from the US. Risk-off trade ensured, seeing Wall Street pull back from their highs, money flow to safe-havens, and AUD/USD fall to an 8-week low. The BOE hiked by 25bp in what could be classed as a relatively dovish meeting. With policy now considered 'restrictive,' money markets lowered expectations of the terminal rate down. The RBA held interest rates for a second month at 4.1%, prompting many to call a peak RBA rate. A Fed survey revealed tighter credit and soft loan demand for US banks as signs that higher rates are indeed slowing the economy. China's services PMI saw a "strong start" to Q3, but their outlook for the next 12 months was less optimistic. Japan’s 10-year yield rose to a 9-year high following the BOJ’s decision to allow the JGB yield to rise above the 0.5% level.

Looking Forward: Market Focus on Key Events and Themes

In the upcoming week, the focus shifts to several significant events and themes, including US inflation data, China inflation data, UK data dump, US consumer confidence, and credit ratings.

Credit Ratings and Their Impact on Global Markets

Fitch's downgrade of the US credit rating has put credit ratings in the spotlight once again, despite some considering them outdated. Investors are likely to pay closer attention to credit ratings moving forward, especially as Moody’s prepares to review Germany’s credit rating and S&P reviews Switzerland’s. These assessments, though unlikely to change significantly, may not be as surprising as they once were.

Inflation Data and Its Implications for the US Dollar

With various measures of inflation in the US trending lower, any deviation from lower inflation figures would likely disappoint markets. A decline in inflation could support equity markets, gold, and risk assets, potentially weakening the US dollar. The trajectory of core CPI's decline will influence market sentiments regarding the Fed's rate hike stance, with bets of an earlier rate cut likely putting additional pressure on the US dollar.