Finimize - 🇺🇸 The US got downgraded

👀 What just happened?

US

• Fitch Ratings downgraded the US’s national debt rating by one notch.
• Apple’s revenue declined again last quarter but its services business made up for it.
• Amazon reported sales and profit that far surpassed investor expectations.

Europe

• The Bank of England (BoE) raised interest rates by a quarter of a percentage point.
• The eurozone economy returned to growth in the second quarter.

Asia

• Activity in China’s manufacturing sector contracted in July.

✍️ What does all this mean?

The US was stripped of its top-tier government debt rating last week by Fitch, which criticized the country’s bloating budget deficit – the gap between outgoings and revenue – and an “erosion of governance” that’s led to repeated clashes over the debt ceiling in the past two decades. The cut, resembling a move made in 2011 by S&P Global Ratings, comes two months after political confrontations nearly pushed the world's biggest economy toward a default on its debt.

Apple posted its third straight quarter of declining revenue and predicted a similar performance for the current period, citing slumping demand for phones, computers, and tablets. But the firm’s ultra-profitable services business came through, counting one billion paying subscribers worldwide and helping lift Apple’s profit by 2.3% from a year ago – defying investor expectations for a 3.6% drop.

Meanwhile, Amazon’s revenue returned to double-digit growth last quarter, outdoing investors’ expectations. That’s mainly thanks to stronger-than-expected online sales and signs that the worst may have passed in its slowing cloud computing division. Layer that plump revenue onto cost-cutting measures like large-scale lay-offs earlier this year, and Amazon’s buoyed-up profit margins led to after-tax earnings that were nearly double expectations.

In the UK, the BoE raised interest rates by a quarter of a percentage point, taking them to 5.25% – their highest level since 2008. The central bank had previously raised rates by half a percentage point at its last meeting a couple of months ago, and traders saw a 33% chance of a similar move this time around too. But a bigger-than-expected fall in the UK’s inflation rate in June probably gave policymakers the confidence they needed to opt for a smaller move.

After sinking into a mild technical recession in March, the eurozone economy returned to growth in the second quarter, expanding by 0.3% from the previous three months – slightly ahead of the 0.2% expected by economists. A 3.3% uptick in the Irish economy pulled up the average, while Germany – Europe’s biggest economy – still lagged behind.

Activity in China’s manufacturing sector shrank in July, offering fresh evidence that the country’s economic momentum is losing steam. The Caixin manufacturing purchasing managers index (PMI), a measure of manufacturing activity in Asia’s biggest economy, declined to a six-month low of 49.2 in July from 50.5 in June, below the key 50 level that marks a contraction. Around when the poor showing was revealed, the government pledged initiatives to awaken the country’s slumbering economy.

🔍 This week’s focus: the US got downgraded

Tax cuts and fresh spending programs, along with several economic upheavals, have inflated the government's budget deficit. Now it’s expected to hit $1.39 trillion for the first nine months of the current fiscal year – an increase of approximately 170% compared to the same time last year. That’s partly due to rising interest rates and the US’s rapidly swelling debt pile, which Fitch forecasts to reach 118% of GDP by 2025 – over three times higher than AAA-rated countries’ median of 39%.

The US Treasury Department has had to sell more bonds in a bid to bridge the burgeoning deficit. That could be why it recently increased its net borrowing estimate for the July-to-September quarter to $1 trillion, a significant leap from the $733 billion it had predicted in early May. But such a move would only exacerbate the US's already ballooning debt pile at a time when interest rates are climbing higher, leading to bigger interest payments and a further widening of the budget deficit. This vicious cycle may explain why some heavyweight hedge fund names – like Bill Ackman – are starting to bet against US government bonds.

📅 The week ahead

• Monday: Sentix eurozone economic index (August). Earnings: Palantir Technologies.
• Tuesday: China trade balance (July), Japan household spending (June). Earnings: AMC Entertainment, Rivian Automotive.
• Wednesday: China inflation (July). Earnings: Disney.
• Thursday: US inflation (July). Earnings: Novo Nordisk.
• Friday: UK GDP (Q2).