According to media reports on November 10th local time in the United States, Moody's Investors Service, an international rating agency, has downgraded its rating outlook for the United States from "stable" to "negative" due to rising US interest rates and deficits. After Moody's downgrade of the US sovereign rating this time, it also means that the last institution to maintain the highest rating of the US will also have a high probability of "surrendering". Moody's move has increased market attention to the US Treasury and also signifies a significant increase in the risk of the US government's shutdown next week (November 17).
As the interest rate hike cycle draws to a close, the US Treasury has become a new 'focal point' in the market. After continuous rating downgrades, the drawbacks of expansionary fiscal policies have also begun to surface. In the just ended fiscal year 2023, the US fiscal deficit increased by 23% year-on-year to $1.7 trillion, accounting for approximately 6.3% of GDP, far higher than the budget value of 5.8% -5.9%.
The massive debt of $33.7 trillion and a "historic" interest rate environment mean that the US fiscal situation in 2024 will become even more challenging. We believe that the growth rate of federal government expenditure in the 2024 fiscal year will be slightly higher than that of revenue, which will drive the budget deficit to expand to around $1.8 trillion and slightly increase its proportion to GDP to 6.4%.
Looking ahead, US fiscal spending will be constrained by two factors: interest expenditure, which is still high and may continue to grow, and overall spending, which is limited by the fiscal deficit, will significantly lack "expansionism". This also means that the momentum of the US economy will significantly slow down.
For the Federal Reserve, the relatively rational strategy is still to maintain the strategy of "using rhetoric to raise interest rates", which means managing inflation expectations through various hawkish rhetoric while not raising interest rates.
The market still tends to end the trading rate hike cycle, and economic momentum will slow down with fiscal constraints. However, from any perspective, credit damage means that the US dollar may become the most direct victim of a rating downgrade.