Despite a late-month rebound supported by pessimistic data from the United States, stock market indexes ended August in the red. The S&P 500 fell by 1.52%, the Nasdaq by 1.58%, the Dow Jones by 2.62%, and the Russell 2000 declined by 4.49%. It’s not a dramatic drop, but there was movement.
Turning to the fixed-income market, 10-year Treasury yields in the U.S. and Europe corrected from mid-month levels. In the U.S., yields went from +10% to +3.23%, while in Europe, they went from +0.33%. Additionally, the Dollar Index rose by 1.47%, while EURUSD fell by 1.37%.
The question is, what or who is to blame for this short-lived market change? The groundwork for the correction was already laid with the rise in assets since the beginning of the year. All that was needed was a catalyst, which the rating agencies provided. Fitch downgraded the U.S. credit rating from AAA to AA+, causing some concerns. Moody’s also downgraded ten U.S. banks and placed giants like U.S. Bancorp and Truist under review, while S&P Global Rating followed suit with several regional banks in the country.
The downgrades were due to expectations of worsening financial conditions, growing national debt, and budget deficits in the U.S. As for the banking sector, the sharp rise in interest rates is putting pressure on many banks’ funding, liquidity, and profits. These factors have also contributed to the devaluation of bank assets and an increased risk of deteriorating asset quality. Additionally, the decline in savings and the rise in household credit card debt have had repercussions on the economy.
However, not all pessimism has been detrimental to the markets. The decline in the number of job openings in the U.S. in July and the downward revision of GDP in the second quarter have encouraged investors. This is because the slowing economic growth is expected to impact consumer demand and potentially affect inflation. It is assumed that the Federal Reserve will no longer need to raise interest rates.
There are differing opinions on the future of interest rates. Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, opposes further interest rate hikes, stating that monetary policy is already restrictive enough to bring inflation down to 2% within a reasonable timeframe. However, there is little reason for optimism as interest rates are expected to remain high until the middle of next year, and consumption could slow down due to the economic slowdown.
It’s important to keep in mind that the effects of monetary policy tightening take time to fully manifest in the economy and markets. Analysts believe that the rate hikes implemented over the past year may still have lingering effects.