
Credit ratings, CPI for China and US in focus: The Week Ahead
Credit ratings become relevant again when Fitch downgraded the US, even if US Treasury Secretary Janet Yellen thinks they are “outdated”. The surprise move may mean that investors will keep a closer eye on upcoming credit ratings, with Germany and Switzerland’s due for a review next week. We also have key inflation data for the US and China. Markets essentially want to see core CPI in the US fall harder and faster to justify their bets that the Fed are done hiking rates. And we’ll also find out if China’s annual inflation rate falls below zero for the first time in over two years.
The week that was:
- Fitch ratings agency downgraded their credit rating for the US to AA+, making it the second agency in history for them to remove triple-A status from the US
- Risk-off trade ensured, seeing Wall Street pull back from their highs, money flow to safe-havens and AUD/USD fall to an 8-week low
- The BOE hiked by 25bp in what could be classed as a relatively dovish meeting (if you consider that just a couple of weeks ago, bets were on for a 50bp hike). With policy now considered ‘restrictive’, money markets lowered expectations of the terminal rate down to 5.65% from the pre-meeting 5.74% level
- The RBA held interest rate for a second month at 4.1%, prompting many to call a peak RBA rate (backed up by a third consecutive quarter of negative retail trade figures)
- The RBA’s quarterly SOMP (Statement on Monetary Policy) saw downgrades to GDP through to 2024, CPI is now expected to be 4.25% by December but trimmed mean CPI remained unchanged through to 2025
- A Fed survey revealed tighter credit and soft loan demand for US banks as signs that higher rates are indeed slowing the economy
- China's services PMI saw a "strong start: to Q3" with "business activity across the sector rising solidly overall", however their outlook for the next 12 moths was less optimistic.
- Japan’s 10-year yield rose to a 9-year high of 0.645% following the BOJ’s decision to allow the JGB yield to rise above the 0.5% level by “a certain degree”, forcing them to step in an intervene
The week ahead (calendar):

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Earnings This Week
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The week ahead (key events and themes):
- US inflation data
- China inflation data
- UK data dump
- US consumer confidence
- Credit ratings
Credit ratings
Fitch have made credit ratings relevant again, even if some such as US Treasury Secretary Janet Yellen disregard them as ‘outdated’. But with the US recently having its triple-A status revoked by Fitch, I suspect investors will keep a closer eye on credit ratings going forward. On Thursday, Moody’s will review Germany’s credit rating and S&P will review Switzerland’s. Whilst there’s a reasonable chance to expect it to amount to nothing, it may come as less of a surprise now if they do.
As it currently stands, Germany hold a ‘AAA’ rating which “reflects its diversified, high value-added economy, strong institutions and record of sound public finances” according to Fitch in May. Switzerland also hold the ‘AAA’ rating with a ‘stable’ credit watch outlook, according to S&P global.
Market to watch: EUR/USD, EUR/JPY, EUR/CHF, USD/CHF, DAX 40, CAC 40, STOXX 50
US inflation data
With most measures of inflation in the US pointing lower, anything but lower inflation figures will likely come as a disappointment. And that could further support the US dollar given the general underlying strength of the employment sector.
That said, the trajectory still counts, so if we see inflation fall faster than expected then it likely supports equity markets, gold and risk to the detriment of the US dollar.
Ultimately, the lower (and faster) core CPI drops, the more convinced markets will be that the Fed are done hiking rates, and bets of their first cut will be brought forward and likely weigh on the US dollar
Market to watch: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones
China inflation data
China’s annual rate of inflation crawled to 0% y/y last month, so the question now is whether it can print its first deflationary figure on over two years. Producer prices have been deflating for nine months and tend to lead the way for CPI, so we can assume that negative consumer prices are fast approaching (even if they do not appear in next week’s figures).
Whilst stagnant inflation numbers coming out of China are the envy elsewhere, it’s also a case of ‘careful what you wish for’. Whilst deflationary producer prices numbers feed disinflation in the West, it is also a sign of weaker growth.
But let us stand back to admire the view. Producer prices are likely near cycle lows, as is the spread between CPI-PPI. And with new stimulus arriving from Beijing (and very few periods of negative CPI), we could be nearing a trough for CPI as well. Oil prices rose over 20% in just five weeks, and that could pose a problem as we head into Q4.
We’re not saying CPI is likely to rise notably next week, but it could spark a bout of risk off if or when CPI begins to rise.
Market to watch: USD/CNH, USD/JPY, S&P 500, Nasdaq 100, Dow Jones, VIX, AUD/JPY
UK data dump
The BOE (Bank of England) delivered a relatively dovish 25bp hike, with markets now believing that the peak will in fact be below 6% (despite fears of a couple of 50bp hikes just a few weeks ago). The fact that inflation measures have finally shown the potential to have topped played a big part of the change in tone, but we also need to see further signs of weakness in the UK economy for the view of a less-hawkish BOE to be maintained.
Market to watch: GBP/USD, GBP/JPY, EUR/GBP, FTSE 100
-- Written by Matt Simpson
Follow Matt on Twitter @cLeverEdge
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