Markets
Moody’s depriving the US from its Aaa credit rating late on Friday to some extent was a symbolic step. It didn’t bring profound, new insights on the US budget deficit and its debt (un)sustainability. However, it comes at the time when Congress is processing President Trump’s ‘Big Beautiful Bill’ that might reinforce the trends of unfunded spending via prolonged tax cuts, higher interest rate payments and debt climbing to levels not seen since immediately after WWII. With the market focus turning away from the trade truce of earlier last week, the Moody’s action put debt sustainability again in the spotlights. US assets were hit the hardest as the sell-US trade resumed. US yields add between 1 bp (2-y) and 6 bps (30-y). The 10-y tests 4.55%. The 30-y at 5%+, is coming closer to the 5.17% multi-year top from end 2023. The turmoil on US debt sustainability doesn’t inspire the Fed to leave its wait-and-see modus. Fed Bostic indicated that he is leaning to only one Fed rate cut this year as he remains mostly worried on the Fed’s inflation mandate. Of course, the US is not the only major industrialized economy facing budgetary challenges. As was the case with the early April US bond sell-off, UK gilts in particular look vulnerable to spill-over effects with the 30-y also adding 5.5 bps (5.45%). The 5.65% April top, the highest level since mid-1998, is again looming on the horizon. Moves in Japanese yields are more modest, but the 30-y yield is holding within reach of the 3% multi-year top touched last week. German yields range between little changed (2-y) and +3bps (30-y at 3.06%), off the intraday highs. Interestingly, today’s move had only limited impact on intra-EMU spreads (Italy-Germany 10-y spread +2 bps at a still low 103 bps). In its spring forecasts, the EC downgraded its EMU 2025 & 2026 growth forecast. The disinflationary impact from trade tensions is seen outweighing other upward divers. The EC sees inflation reaching 2% mid this year and averaging 1.7% next year. This disinflationary message from the EC initially only had limited impact on the intraday moves, but EMU bonds rebounded later in the session. Higher credit risk premia block last week’s positive equity momentum with US indices underperforming (S&P 500 -1.0%, Nasdaq -1.4%, EuroStoxx 50 -0.7%). No white smoke is expected from the Trump-Putin call later today.
Dollar losses initially were modest this morning, but gained traction during the European trading. DXY dropped from the 100.9 area to 100.3. Contrary to last week, the euro this time slightly outperforms the yen. EUR/USD rebounded from the 1.119 area to currently change hands near the 1.126 area. USD/JPY eases to 145. EUR/GBP (0.842) is losing marginal ground against the single currency. A rather wide-ranging deal between the UK and the EU, includes not only a defense and security partnership, but also an agreement on fishery and food standards and other regulation. Both parties also engaged to work to a solution on student exchange programs. However, for now any potential positives for the UK/sterling are overshadowed by the overall risk-off.
News & Views
The European Commission (EC) downgraded its real GDP growth forecasts in today’s spring update. They are conditioned on the current general US tariff rate of 10% and the 25% on steel, aluminum and cars and assume no EU retaliatory measures. Nor do they take in account the higher spending for defense because plans weren’t detailed enough yet. Euro area GDP would expand by 0.9% this year and 1.4% in the next. The weaker growth reflects a tariff-related hit to European exports, which would grow just 0.7% vs. 2.2% anticipated in the November update. Private consumption is the main engine powering the economy, alongside a rebound (although a less pronounced one than in November) of capital investments. Inflation is expected to cool more rapidly on the combination of lower energy prices, intensifying (Chinese) competitive pressures and a stronger euro. This is only partially offset by higher inflation in food and services. Prices in general would rise 2.1% in 2025 and 1.7% in 2026. EC budget deficit forecasts were raised from -2.9% in 2025 to 3.2% an would deepen further marginally in 2026 to 3.3%.
EU leaders gave initial approval to the €150n loan plan to help fund a defense infrastructure on a European level, the Financial Times reported. The formal green light is expected for next week. The European Commission will raise the money on capital markets before distributing it to member states as loans. The money can be spent on products where at least 65% of the components’ value are from arms companies in the EU, Ukraine, Iceland Lichtenstein, Norway and Switzerland. Third countries’ arms companies can account for a maximum of 35% of the purchase, unless they sign a bilateral defense pact with the EU. The EU and UK have signed such a deal today.
