Weekly Market Update - Week ending 4 August 2023

• Fitch Ratings downgrades the US from AAA to AA+.

• The US labour market added lesser jobs than expected, but wages continued to rise, and the unemployment rate fell.

• Apple shares record worst decline since September 2022.

• Rate hikes in the UK further restrict growth in hopes of taming inflation.

1. Fitch Ratings downgrades the US from AAA to AA+

Fitch Ratings downgraded the United States of America’s Long-Term Foreign-Currency Issuer Default Rating (“IDR”) from AAA to AA+ with a stable outlook. The US’s country ceiling remains unchanged and affirmed at AAA. Fitch Ratings cited factors such as (1) expected fiscal deterioration over the next three years, (2) high and growing general government debt burden and (3) the erosion of governance relative to peers. Other than the downgrade, Fitch Ratings also announced a further increase in the US Government debt and a decline in the credibility of policymaking may result in further downgrades. However, suppose the US Government can reduce the debt-to-GDP ratio, and there is meaningful improvement in governance. In that case, Fitch may consider restoring the US credit rating to AAA. Negative sentiment in the market led to the selloff across equity indices alongside the 10-year US Treasury surging to a peak of 4.19%. For the week, the Dow Jones, S&P 500 and Nasdaq ended in the red, down -1.1%, -2.3% and -2.9%, respectively.

2. The US labour market added lesser jobs than expected, but wages continue to rise, and the unemployment rate falls

On the economic front, the US labour market continues to stay resilient. The jobs report released on 4 August revealed that the US economy created 187,00 jobs in July, coming in below expectations of 200,000 but remains about twice the number needed per month to keep up with growth in the working-age population. Additionally, average hourly earnings for all employees on US private nonfarm payrolls continue to rise faster than expected, rising 0.4% in July, the same pace as in the prior month and above the consensus of a 0.3% increase. Over the past 12 months, average hourly earnings have increased by 4.4% in July, surpassing consensus of 4.2%. The unemployment rate also fell expectedly to 3.5% in July from 3.6% in June and below the consensus of 3.6%.

3. Apple records worst decline since September 2022

Over on the corporate front, the notable performance came from Amazon (+9.5%), Booking (+8.3%), DraftKings (+2.6%) and Dropbox (+6.1%) due to upbeat Q2 2023 earnings. On the other hand, Apple recorded its worst decline (-4.8%) since September 2022 after the company announced that it expects another decline in revenue in the September quarter. However, it signalled that iPhone sales would do better than a 2% year-on-year decline. Apple’s earnings beat expectations on profits and revenues, but overall sales declined by 1% as iPhone, iPad and Mac sales slowed. The declines in Apple’s hardware overshadowed its strong performance in the company’s profitable services division, which grew 8% and is expected to grow even faster in the current quarter.

4. Rate hikes in the UK further restrict growth in hopes of taming inflation

Meanwhile, over in the United Kingdom, the Bank of England raised interest rates further by another 25 basis points. It was making a statement to maintain rates and restrictive levels long enough to bring inflation back to its 2% target. Shortly after the rate hikes, the British pound fell towards 1.26. This was also caused by the credit downgrade by Fitch on the US, which led investors to turn towards the dollar. Shifting our view towards the UK composite PMI data, we observed a higher-than-estimated value of 50.8 in July 2023. Although the private sector shows growth, the underlying business volumes indicate a weak growth and contracting outlook.

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This Weekly Market Update is sourced from Bloomberg and various financial news.

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