Good morning and welcome to The Gate powered by CFG, Inc. This week has been quite the week for the markets. The US Debt was downgraded for the first time in over 10 years by a top rating agency and CPI Expectations are coming in cooler. With all this, the big question remains: what will the FED do in September?
Last week Fitch’s rating agency downgraded the United States debt rating from AAA to AA+ with a bleak outlook for the future. On the release of this news, the markets began to sink including equities and commodities, while the dollar rose slightly along with a sharp rise in bond rates (which causes negative returns in bond funds due to the inverse relationship).
This response seems to be a perfect example of the markets pricing in more rate hikes. Typically, when the FED raises rates, it puts more strain on corporations who use debt funding, thus lowering stock prices. Also, if the FED keeps raising rates, it will strengthen the dollar which typically results in a lower price of precious metals, especially gold and silver. As the FED raises interest rates, bond yields begin to rise which often adversely affects bond funds due to their inverse relationship.
Another major event this week was the CPI announcement. Today, the consumer price index is forecasted to come in lower than expected, which should be bullish for the markets in the long run, but this forecast has not been able to rally the markets in the short run. If the markets don’t turn and rally in the next day or two, it will be time to adjust to a bearish outlook for the next couple of months.
On the technical side of things, we see that the S&P 500 Index has come down to its 50-day moving average, which should act as a support that holds prices up for some time; however, if prices break down beneath this blue line, we will potentially see a significant drop in the markets overall.