Futures Rise After Market Pullback; Fitch Downgrades US Credit Rating

The Dow (-1.1%), NASDAQ (-2.8%) and S&P 500 (-2.3%) each declined for the week.  In similar fashion, taxable bonds and tax-free municipal bonds fell about 0.5%-1.0%, as the 10-year Treasury yield reached 4.19% on Thursday, rising 2.4% to end the week. The increase in 10-year Treasury yields last week was mainly due to a downgrade in US credit rating by one of the ratings’ agencies, Fitch.

For the first time since 2011, one of the credit rating agencies, Fitch, downgraded the US from AAA to AA+ on Tuesday, which concerned markets as the Dow Jones Industrial Average fell over 300 points. The U.S. had proudly held to that top-notch AAA debt rating for decades, reflecting its status as the world's biggest — and safest — economy, one that has never defaulted on its debt obligations. This move by Fitch was heavily criticized, with Treasury Secretary Janet Yellen and CEO of JPMorgan Chase Jaime Dimon publicly stating their disagreement with the downgrade and that it contained no new fiscal information. The US continues to be viewed by investors around the world as the safest place to store funds, and we believe this move will not change that viewpoint anytime soon.  

 The ISM Manufacturing Index and the labor report showed a slight rise from the prior month which gives some fuel to the dovish members of the Fed. However, with the Consumer Price Index report set to come out later this week, energy prices on the rise and the core rate of inflation still high, our guess is that the hawkish members of the Fed will still be able to dictate what the Fed’s future path is with regard to interest rate hikes.

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