The calm before the debt storm?

Hello, it's Friday, the 23rd of May. The last week or so have had slightly less of the sort of nerve-jangling, big political stories that we've seen a lot of over the last couple of months. But nevertheless, lots going on behind the scenes, most notably I suppose, relating to the sustainability of debt levels in the US. Just for context for you, there's some concerns around the level of indebtedness in the US, which is to a point, understandable. The deficits and everything else have grown substantially over the last few years. But there's no real suggestion that there's any sort of immediate peril from this. But what I suppose market participants are concerned around is if these deficits continue to grow, quite simply the cost of servicing them will continue to growth. And of course, If you're looking at policies that you're seeing in the US at the moment, some of them seem to be aimed at minimising taxation, which is what you use to fund your debt. And of course, if tariffs for example knock confidence and knock spending, that will then likely impact taxation as well. Or indeed, if you impact overall economic growth, that could impact your tax take as well. So there's lots of reasons why you can understand there are some concerns over it, some of it's perhaps a little bit overdone in the short run, but undoubtedly is remaining a concern for the longer-term.

We also had last week Moody's were the final major rating agency to downgrade the US debt rating. It's only a notch down from AAA, the absolute best of the best, to AA1. So it's only almost a symbolic move really. Given A, all the other rating agencies have done it already and B, it's still amongst the absolute best creditors out there. But it does again reflect the fact that we've gone from absolutely imperious and unimpeachably sort of strong statement for the US government's finances a decade or so ago to where it is today, which is still the biggest economy in the world, still nice and strong, but perhaps not quite as robust as it would have been considered only a sort of a handful of years ago.

Elsewhere we've got tariffs sort of starting to bite but perhaps not in the way you might expect. We've spoken before about the fact that Wall Street seems to have moved on from tariffs. Markets have broadly recovered to where they were ahead of this 'Liberation Day' surprise. And indeed, looking for any sort of economic identifiers, canaries in the coal mine, if you like, to see if there's been any sort of impact in terms of business and consumption. So far, things look all right there in the US too. We had the Purchasing Managers' Indices out in the US this week in expansionary territory, 52.1 which demonstrates that purchasing managers are expecting to sort of buy stuff in for businesses, stock, for example, really sort of looking to moderately expand. And that's actually up from April's level as well, which was very mildly expansionary. So indicating again overall the fact that businesses are sort of heading the right way. Also things like employment or unemployment, the USD and all those levels look sort of fairly stable, so if tariffs are having an impact it's you know under the surface at the moment, behind the scenes if you like and overall not seeing big impacts in terms of business sentiment as of today. Although clearly there are still some of those lingering uncertainties. A lot of these tariffs are really sort of on pause looking for negotiation to take place, rather than totally out of the water. And so if you're doing long-term, significant planning as a consumer or indeed as a business, I think there are still sort of question marks over whether you want to really commit significant financial projects, bearing in mind that you may still get surprised in terms of what comes down the track.

Perhaps the impact of tariffs is being felt elsewhere. So firstly on that, data out this week shows that the revenue from tariffs is clearly going up. So they are they are starting to bite. Perhaps they're not being felt on the ground in the US today, but there are some data which suggests they're being sort of felt elsewhere, you know things like Purchasing Managers Indices in Europe are in contractionary territory. Again, sort of modestly contractionary, don't want to overdo it, and then we saw some data from Japan where export growth, it's still growing, exports out of Japan, but at a slower clip, again the blame for that being laid firmly at the doors of tariffs. And so perhaps at the moment where the uncertainty is being felt is actually outside of the US, whereas the US itself is kind of carrying on regardless in many ways.

So overall, a sort of mixed picture this week, a quieter one in many ways, although if you're invested in the US stock market, it wouldn't have felt that quiet. It was one of the more volatile weeks we've seen since the start of April because of this concern over the debt position and everything else, but overall, less sort of political noise being thrown at us, an opportunity really to sort of sit and take stock and pause for breath, if you like. Overall, things seem sort of fine in terms of market conditions. Even the data we've been touching on, none of it's particularly concerning. Overall sort of talking really about economies, consumers, businesses that are sort of ticking over and in reasonable shape and positioned hopefully well to go for the rest of the year from here. That's it from me. Have a good weekend when you get there and we'll see you next time.