Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Monday the 19th of May. One of the credit rating agencies, it doesn't matter which, reduced the US government's credit rating from something to something else.
If one is prepared to accept that a country with the ability to print its own money could be less than a pristine credit rating, then the move does seem valid. US President Trump's policies are likely to increase the US debt burden at an unsustainable pace over the next few years, and influential donor Musk's doge efforts are very unlikely to reduce borrowing. They might actually work to increase it.
That does not mean that the debt in the United States cannot be funded. Wealth levels are at record highs after all. Government reactions are likely to be muted to the downgrade, although this does come at a time when more conservative investors have been questioning the role of US assets as safe assets.
There is little new information in the downgrade itself. One slightly concerning point is that the administration attacked a chief economist over the downgrade. First, a chief economist should never be attacked, but second, this particular chief economist is not part of the rating process.
That suggests a lack of understanding in the administration about ratings processes, and markets seem to be questioning how effective and coherent the administration's policy response is. China's official economic data had softer domestic retail sales growth and somewhat stronger-than-expected industrial production data for April. The domestic demand picture is not especially encouraging, with sales of consumer goods and autos slowing.
On the production side, Trump's recent tariff retreat may be encouraging US importers to start stocking up for Christmas early. The erratic nature of US trade policy might make it prudent to buy at current trade tax levels, even though this may mean increased prices for US consumers. It seems very unlikely that price increases will be avoided, and retailers are starting to make that clear to the US public.
In Portugal, the far-right Che Guevara party has made significant gains in the parliamentary elections. Prime Minister Montenegro, whose party won the largest number of seats, has indicated that they will not do any deals with the far-right. The election is another example of the broader trends towards scapegoat economics and prejudice politics.
During times of dynamic structural change, like the fourth industrial revolution, people tend to be fearful of the future. There is then a tendency to look for groups to blame for the uncertainty and changing social patterns, and once scapegoats have been identified, prejudice politics tends to follow. Prejudice undermines economic performance by putting in place irrational barriers for the labour force, both formal and informal barriers.
The calendar doesn't have a great deal of data. No one is going to care about final April euro area consumer price inflation figures. However, there are no fewer than six US Federal Reserve speakers.
Coming so soon after another credit rating downgrade for the United States, there's bound to be some comment on fiscal policy. Trade taxes and their impact on inflation will also be an obvious focus. The Fed has to contend with slower growth and rising inflation, as trade taxes and uncertainty affect the US economy, and it's still not clear which side of the growth-inflation focus they will prioritise.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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