US Credit Rating Downgrade: Financial Markets 19-25/05/2025

Introduction:

The current issue of the Financial Markets Report discusses several important economic issues across all levels for major global economies, coinciding with the first round of Sino-US negotiations. It also reviews several economic data that markets are awaiting release this week.

Main keywords:

• Global investment banks raise their forecasts for Chinese economic growth.

• Global banks reduce the likelihood of a recession in the US economy, and some even dismiss the possibility of a recession.

• The global economy awaits news of trade agreements with the US, as countries such as Japan, Vietnam, Japan, and South Korea rush to conclude them.

• The Chinese and Australian central banks make decisions on interest rates.

• Moody's downgrades the US credit rating due to rising debt concerns and the interest burden.

• The Japanese economy shrinks for the first time in a year, amid concerns about the impact of US tariffs.

Economy Spotlight. Major Economies:

First: US Economy: Credit Rating Downgrade

Last week was the best week for the US economy since President Donald Trump took office, specifically from the time he threatened to impose sweeping tariffs until they were imposed on April 2.

News of economic agreements with both the UK and China had a positive impact on markets, which recouped losses incurred since April 8.

The positive news continued last week, with inflation data showing declines in both the Consumer Price Index (CPI) and Producer Price Index (PPI).

The CPI fell to a three-year low of 2.3%, while the PPI fell to 2.4%, its lowest level since November 2024.

Despite a decline in retail sales and a fall in consumer confidence to its second-lowest level on record, updated forecasts show a positive outlook.

Goldman Sachs lowered its recession forecast from 45% to 35%, while Bank of America analysts viewed these developments as good news. Barclays Bank has removed the term "recession" from its baseline forecasts. Therefore, the US economy is at a critical juncture, as President Trump's actions and the expected talks in the coming weeks are likely to restore the US economy, along with the global economy, to a brighter future.

Regarding the most significant news affecting the US economy, Moody's has downgraded the US credit rating due to concerns about the rising value of its debt, which will reach 98% by 2024, along with concerns about rising interest burdens on that debt.

The agency lowered America's credit rating from Aaa to Aa1. Moody's is the third agency to downgrade the US economy, following Standard & Poor's in 2011 and Fitch in 2023.

Analysts have indicated that this downgrade could raise concerns in financial markets and hinder Trump's ability to cut taxes.

The US economic agenda appears to be light next week, with trade deals likely to be the highlight, along with House Republicans' efforts to pass Trump's budget.

Second. European Economy:

The European economy experienced mixed results last week. While data showed unexpected growth in the UK economy, coupled with rising employment and industrial production in the eurozone, the eurozone economy grew by 0.3% quarter-on-quarter for the first quarter of 2025, below expectations.

Expectations continue to point to the possibility of the European Central Bank cutting interest rates after keeping them unchanged at its previous meeting. This increases potential pressure on the ECB given the lack of trade agreements with the US to address US tariffs, which could pose an inflationary threat to the single-zone economy.

The European economy awaits inflation data for both the eurozone and the UK this week, with inflation in the eurozone expected to remain stable at 2.2%.

Third. Japanese Economy:

The Japanese economy is under significant economic pressure due to US tariffs, with data showing that it contracted for the first time in a year. The economy shrank by 0.7%, down from 2.4%. This contraction was attributed to weak private consumption and a decline in exports in vital sectors such as the automotive sector.

Analysts noted that the contraction in the Japanese economy highlights its internal fragility and its vulnerability to US tariffs. Many of them indicated that if Japan fails to reach a solution with the US, this could push the Japanese economy into recession.

Finance Minister Katsunobu Kato stated that he intends to meet with Scott Bessent next week to discuss currency issues, which he had previously discussed with the US Treasury Secretary. This week, the Japanese economy awaits the trade balance report, which is expected to shrink by half, affected by tariff concerns. The week will conclude with the inflation report (core consumer price index), which is expected to rise to its highest level since October 2024 (at 2.4%).

Fourth. Chinese Economy:

Alongside the US economy, the Chinese economy has been in for some good news, with the 90-day interim trade agreement reached. This has prompted global investment banks, most notably Goldman Sachs and UBS, to improve their forecasts for Chinese economic growth.

China is also accelerating the rollout of a new economic development model for both domestic and foreign markets, with the aim of encouraging domestic consumption and achieving the desired economic growth.

China's efforts to achieve comprehensive development are evident in its focus on implementing the 13th and 14th Five-Year Plans, as it prepares to formulate the 15th Five-Year Plan (2026-2030), which is expected to focus on sustainable and healthy development.

China, for its part, awaits important economic data, most notably retail sales, which are expected to decline from 5.9% to 5.5%, coinciding with expectations of a decline in industrial production, returning to its lowest levels since October of last year. China will also make its interest rate decision on Tuesday, which has remained unchanged since October 2024.

Economy Spotlight. Economic Calendar and What to Expect in the Markets Next Week:

Global markets will be awaiting the following economic data: