The Morning Edge: Fed Weighs Moody’s Downgrade as Fiscal Strain Casts Long Shadow

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Factors:  Russia-Ukraine Ceasefire Talks 

TODAY’S WATCHLIST
 - Eurozone Balance of Payments
 - Sitharaman to speak

THE BIG STORY
US Federal Reserve officials struck a cautious tone on Monday as they assessed the potential fallout from Moody’s downgrade of the US government's credit rating, the last of the major agencies to strip the country of its top-tier status. Speaking at a conference in Atlanta, Fed Vice Chair Philip Jefferson emphasised the central bank would consider the downgrade in terms of its impact on achieving economic stability, rather than through a political lens. While not an immediate policy trigger, officials acknowledged that higher borrowing costs tied to worsening fiscal conditions could act as a long-term drag on economic activity.

Atlanta Fed President Raphael Bostic warned of a possible ripple effect across capital markets, suggesting that investment appetite could hinge on how the downgrade reshapes economic expectations over the next three to six months. With deficits soaring and the Republican-backed “Big Beautiful Bill” poised to add trillions more to the debt pile, fears are mounting that the US is approaching a fiscal tipping point. Though the Fed has long flagged concerns about unsustainable borrowing, the credit downgrade has added fresh urgency to an already fragile outlook.

DATA
China’s industrial output rose 6.1% year-on-year in April, easing from March’s 7.7% pace but exceeding expectations of a 5.5% rise, according to the National Bureau of Statistics. Retail sales grew 5.1% during the month, below forecasts of 5.5% and down from March’s 5.9%, pointing to persistent weakness in consumer demand. Fixed asset investment increased 4.0% in the first four months of 2025, slightly underperforming expectations of a 4.2% gain.

Meanwhile, the European Commission sharply downgraded its growth forecasts for the euro zone due to the ongoing US-led trade war and the uncertainty surrounding its resolution. Euro area GDP is now projected to grow just 0.9% in 2025, down from 1.3% expected last November, with 2026 growth revised to 1.4% from 1.6%. The Commission cited a weakening global trade outlook and increased policy uncertainty as key drivers of the revision.

WHAT HAPPENED OVERNIGHT
US stocks indexes ended largely flat on Monday, with sentiment weighed down by Moody’s downgrade of the federal government’s sovereign credit rating to "AA1" from "AAA" due to the ballooning $36 trillion debt and interest burden. Energy and consumer discretionary sectors led the losses. However, TXNM Energy surged 7% after announcing it would be acquired by Blackstone’s infrastructure unit in an $11.5 billion deal. Novavax shares jumped 15% following long-awaited US regulatory approval for its COVID-19 vaccine, offering a bright spot in an otherwise subdued session.

US Treasuries faced renewed pressure on Monday as bond yields rose following Moody’s decision to strip the United States of its last AAA credit rating. While the downgrade wasn’t unexpected as Fitch and S&P had already cut their top ratings in past, it comes at a time of heightened fiscal uncertainty. Benchmark 10-year Treasury yields climbed 1 basis point to 4.449%, as investors reacted to concerns that President Donald Trump’s newly advanced tax-cut bill, approved by a key congressional committee on Sunday, could significantly inflate the national debt.

The US dollar declined broadly on Monday, hitting over one-week lows against safe-haven currencies like the yen, Swiss franc, and euro, following a surprise downgrade of the US government's credit rating by Moody’s late Friday. The agency lowered the US sovereign rating by one notch, citing rising concerns over the country’s ballooning $36 trillion debt load. Weighing further on sentiment were renewed trade tensions, as Treasury Secretary Scott Bessent reiterated President Trump's commitment to impose tariffs on uncooperative trade partners. The dollar fell 0.55% against the yen to 144.82, snapping a four-week winning streak driven by recent trade optimism and easing recession fears.

Brent crude oil prices ended slightly higher on Monday as concerns over a breakdown in US-Iran nuclear talks outweighed the impact of Moody’s downgrade of the US sovereign credit rating. Brent crude rose 13 cents to settle at $65.54 a barrel, while US West Texas Intermediate crude edged up 20 cents to close at $62.69. Both benchmarks had gained over 1% in the previous week, supported by easing US-China trade tensions and expectations of stable global demand.

Day’s Ledger

Economic Data:

• Core Sector Output for April
• Eurozone Balance of Payments for March
• US Johnson Redbook Retail Sales for week-ended
• Eurozone Flash Consumer Confidence Indicator for May

Corporate Events:

• Jan-Mar earnings: Aster DM Healthcare Ltd, Dixon Technologies, EIH, Fortis Healthcare, Gland Pharma, Godawari Power & Ispat, Hindalco Industries, JK Tyre and Industries, Max Healthcare Institute Limited, NHPC, Solar Industries India, Torrent Pharmaceuticals, United Spirits, Whirlpool of India, Zydus Lifesciences
• Astra Microwave Products to consider raising of fund
• Kridhan Infra to consider raising of fund issue
• State Bank of India to consider raising of fund
• Ugro Capital to consider raising of fund and right Issue

Policy

• Boston Fed Reserve President Collins to speak
• St. Louis Fed Reserve President Musalem to speak
• Finance Minister Sitharaman to address CCI

TICKERS

• Bajaj Auto weighs KTM restructuring plan, denies €566 million loan
• Bharat Electronics March quarter net profit grows 18.4% despite high base
• DLF March quarter net profit rises 39% to ₹12.82 billion; ₹6 dividend declared
• Kotak Life announces ₹11.78 billion bonus for FY25, up 17% on year
• Petronet LNG March quarter profit jumps 45% despite 11% revenue dip
• PI Industries March quarter profit falls 11%; declares ₹10 per share dividend
• Power Grid March quarter profit up 5.1%; clears ₹1.25 dividend, to exit two JVs
• Rail Vikas wins ₹1.79 billion IRCON contract for Chhattisgarh signalling

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