Despite the late-month rebound, which was oddly supported by pessimistic data from the United States, the stock market indexes ended August in the red: the S&P 500 fell by 1.52%, the Nasdaq by 1.58%, the Dow Jones by 2.62%, while the Russell 2000 declined by 4.49%.
Turning to the fixed-income market, 10-year Treasury yields in the U.S. and Europe corrected from mid-month levels of +10% to +3.23% and +0.33%, respectively. In addition, the Dollar Index rose by 1.47%, while EURUSD fell by 1.37%. It's not dramatic, but at least some movement.
What or who is to blame for a short-lived market change?
Considering the rise in assets since the beginning of the year, the groundwork for the correction had already been laid. All that was needed was a catalyst, which the rating agencies provided. First, analysts at Fitch downgraded the U.S. credit rating from AAA to AA+.
Subsequently, Moody's downgraded ten U.S. banks with a delay of several months and placed giants such as U.S. Bancorp and Truist on review. S&P Global Rating followed suit with several regional banks in the country. Well, better late than never.
To provide some context, the downgrade in the first case was due to expectations of worsening financial conditions over the next three years, the country's growing national debt, and budget deficits.
In other words, the wave of problems will not dissipate soon.
As for the banking sector, the sharp rise in interest rates is putting pressure on many banks' funding, liquidity, and profits. These factors have also contributed to the devaluation of bank assets and an increased risk of deteriorating asset quality.
Finally, the decline in savings has had repercussions. Over the past two years, total reserves in the United States have plummeted from $2.1 trillion in August 2021 to less than $200 billion. Simultaneously, household credit card debt continues to rise, accompanied by increased delinquencies.
However, not all pessimism has been detrimental to the markets.The decline in the number of U.S. job openings in July to a 28-month low of 8.827 million, down from 9.165 million in the previous month, and the downward revision of GDP to 2.1% from the previous 2.4% in the second quarter, have indeed encouraged investors.
This is due to the expectation that slowing economic growth will first impact consumer demand and subsequently affect inflation. As a result, it is assumed that the Federal Reserve will no longer need to raise interest rates.
Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, has expressed opposition to further interest rate hikes in the United States, stating that monetary policy is already sufficiently restrictive to bring inflation down to 2% within a "reasonable" timeframe.
No one seems to consider that, even if monetary policy tightening ends, there is little reason for optimism. Interest rates will remain high until the middle of next year, while consumption could slow down due to the economic slowdown.
Keep in mind that monetary policy operates with a long and variable lag. Analysts believe that since the Fed began tightening policy just over a year ago, the effects of the 525 basis point rate hikes may still take some time to manifest themselves in the economy and markets fully.
