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Fitch Puts US on Watch; Will it Matter in Washington?

Fitch Puts US on Watch; Will it Matter in Washington?

The U.S. debt ceiling saga continues to hang over global markets, with the White House and Republicans both citing progress in the latest round of talks but no breakthrough yet.

Ratings agency Fitch opted not to wait, placing the country’s “AAA” rating on watch for a possible downgrade – the first major agency to do so. That could raise the stakes in protracted negotiations as the June 1 “X-date” looms – or policymakers in Washington might simply choose to ignore it.

The ratings watch has given a further boost to U.S Treasury yields and the greenback, with the dollar index DXY notching new trend highs while Japan’s yen hit its lowest since Nov. 30 and the euro and sterling are sitting on major chart support.

Two-year Treasury yields have also extended to highs not seen since mid-March, while the yield on Treasury bills maturing in early June climbed further above 7%.

Stock markets across Asia are in the red, apart from Japan’s effervescent Nikkei, although S&P E-mini and Nasdaq futures have bounced after a strong revenue forecast from Nvidia Corp NVDA

Europe’s data calendar is fairly light, with German final Q2 GDP the main release. However, there are plenty of central bank speakers, with comments from Bundesbank head Joachim Nagel and ECB chief economist Philip Lane likely to draw the most interest.

Bank of England monetary policy committee member Jonathan Haskell’s speech in Washington will also be watched after UK price data again surpassed expectations on Wednesday. That left Governor Andrew Bailey fretting about “sticky and stubborn” inflation while markets priced in further policy tightening.

Expectations of a Federal Reserve rate hike in June also continued to creep up, even after the May 2-3 meeting minutes showed little consensus on the need for further increases.

Here are some key developments that could influence markets on Thursday:

  • German final Q1 GDP and June GfK consumer sentiment
  • Bundesbank chief Nagel, ECB’s Lane and de Guindos, and BoE’s Haskell speak
  • U.S. weekly jobless claims and second estimate of Q1 GDP
  • Earnings: Dollar Tree, Ralph Lauren and Gap

Will Fitch’s rating watch make a difference in Washington?

It’s hard to say for sure. Fitch’s decision is a clear sign that the agency is concerned about the U.S.’s fiscal outlook, and it could put pressure on policymakers to reach a deal on the debt ceiling sooner rather than later. However, it’s also possible that lawmakers will simply ignore Fitch’s warning and continue to play chicken with the debt ceiling.

Only time will tell what will happen, but one thing is for sure: the stakes are high. A default on U.S. debt would have a devastating impact on the global economy, and it could even lead to a financial crisis.

So far, both sides in the debt ceiling debate have shown a willingness to take the country to the brink of default. But if Fitch’s rating watch is any indication, the risks of doing so are starting to become more clear.