Caitlin McCabe
Appearances
WSJ What’s News
Growing Debt, Tariffs Weigh on U.S. Outlook
I think it's important to start with a bit of context. Moody's had assigned what it calls a negative outlook for America's sovereign rating in November 2023. And it has remained the last of the credit rating agencies to maintain its AAA rating on the U.S. Both Fitch and S&P had issued downgrades in the past.
WSJ What’s News
Growing Debt, Tariffs Weigh on U.S. Outlook
And so now what Moody's is saying is that this toxic combination of widening federal budget deficits, a rising debt burden, and falling debt affordability has given the agency concerns about America's fiscal strength.
WSJ What’s News
Growing Debt, Tariffs Weigh on U.S. Outlook
Specifically, Moody's points to sustained high tariffs as well as unfunded tax cuts, meaning that there's this expectation that that there will be a full extension of the 2017 tax cuts that are set to expire at the end of this year. But Moody's warns that these may not be sufficiently offset by other revenues.
WSJ What’s News
Growing Debt, Tariffs Weigh on U.S. Outlook
The Moody's report also says it expects GDP growth to moderate to 2% this year and 1.8% the year after that. And it says that even in its most optimistic scenarios, the U.S. remains still materially weaker than other AAA-rated sovereigns.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
So what we're seeing is what the world's largest banks have been doing really for the last several weeks now, which is essentially escalating their warnings about the American economy.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
So Goldman raised the probability of a recession in the US economy in the next 12 months to around 35%. And that's the second time that Goldman has done this in the past few weeks. In addition, the bank said it is expecting an increase in pricing pressures, a decline in GDP, and that it is expecting an increase in the year-end unemployment rate.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
And basically in calculating this stuff, Goldman's looking at the deterioration in business and consumer confidence. We saw some of this come through last week with the University of Michigan Sentiment Survey. It also said it's doing it because of comments from the Trump administration that it's willing to tolerate some economic weakness in pursuit of their policies.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
Meanwhile, we also have Barclays saying something similar. It says that for the first time in years, it finds itself, quote, genuinely worried about risk assets. And it says that cash allocations for investors should be higher.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
Yeah, it's been pretty ugly this morning in Asia and Europe. And we're already seeing that bleed through in US pre-market trading, where US stock futures are lower. And I think this speaks to concerns about just not US growth, but global growth too. Of course, there are expectations that tariffs will hit these economies and some of their important sectors very hard.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
And I think it's worth noting that a lot of these areas and countries were already at a disadvantage in terms of economic strength, even before all of this started. And so in terms of market action, what we're seeing this morning is really a flight to safety everywhere. Gold, which has had a pretty stunning rally this year, it's up again this morning. U.S.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
bond prices are up again, sort of considered another flight to safety. Other risk assets like Bitcoin is falling again. And I think what investors are saying right now is riskier assets are not where they want to be. And so instead, they're hanging out in cash or other cash like products.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
I think that's exactly right. And I think a really key place that we can look is the VIX. It's also known as Wall Street's fear gauge. And this is a metric that people really look to quite closely when things are starting to get choppy in markets. This morning, the VIX is trading around the 23 range.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
And when we think about the VIX, anything over 20 indicates that nervousness and expectations for volatility are increasing pretty markedly in markets. So to see the VIX trading around the 23 range this morning is something that is important to pay attention to. especially given where it was trading last week. Last week, we were seeing it in the 17 to 18 range.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
So we are definitely seeing a noticeable leg up in expectations for volatility today.
WSJ What’s News
Stocks Slump as Trump Threatens Tariffs on All U.S. Trading Partners
Happy to. Thanks for having me.