Moody's downgrade and Walmart

Stocks feel very overbought to me, and I suspect the reaction of the Moody’s downgrade of the US might be more severe in the stock than in the bond market, at least early in the week.  That aside, two things caught my attention over the weekend.  And if you aren’t caught up on last week, read the update for the week ended May 16, 2025 here.

Moody’s downgrades the US from Aaa to Aa1

I will first provide White House Director of Communications Steven Cheung’s comment on X following the announcement Friday afternoon of Moody’s downgrade of the US from Aaa to Aa1, in which – in usual Trump administration defensive fashion – the administration attempts to discredit Moody’s analyst Mark Zandi: 

From what I understand, Mark Zandi is in fact the chief economist at Moody’s Analytics, which is not the unit that handles sovereign ratings (Moody’s Ratings).  This of course is the usual “deflect and blame” strategy of the Trump Administration.  Now that I have that off my chest, let’s dig deeper into the downgrade. 

Moody’s is the last of the big three global credit rating agencies to downgrade the United States from triple A, with S&P Global Ratings downgrading the US from AAA to AA+ in 2011, and Fitch Ratings Services downgrading the US from AAA to AA+ in 2023, the same year that Moody’s put the US on credit watch for a potential downgrade. I agree with Treasury Secretary Scott Bessant when he said on Sunday that Moody’s is a lagging indicator, blaming the Biden Administration which – to be fair – oversaw a spending spree that certainly did not help the US deficit. However, the reality is that the fiscal situation of the US has been worsening now for several decades, as you can see below in the graph from FRED that shows the ratio of US debt to GDP.

You can find the Moody’s press release regarding the downgrade here.  I found the extract below the clearest indication of Moody’s thinking:

“Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs. We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration. Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government's debt and interest burden higher. The US' fiscal performance is likely to deteriorate relative to its own past and compared to other highly-rated sovereigns.

The stable outlook reflects balanced risks at Aa1. The US retains exceptional credit strengths such as the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency. In addition, while recent months have been characterized by a degree of policy uncertainty, we expect that the US will continue its long history of very effective monetary policy led by an independent Federal Reserve” [underline/italics MY EMPHASIS, thank goodness for the Fed!].

In my opinion, the downgrade from Moody’s was coming and means much less than it might otherwise because the US Treasury bond market remains the “gold standard” of global bond markets in terms of size and liquidity, and the US Dollar remains the world’s primary reserve currency.  These attributes provide the US with a rather unique ability to mismanage its fiscal house, something that has been going on now for two or more decades regardless of which party has controlled Congress and/or The White House.  However, Moody’s is sending a message to Congress and the Trump Administration that the fiscal path of the US is heading in the wrong direction, and does not appear sustainable in the long-run. 

Bond market vigilantes will be carefully monitoring Mr Trump’s desire for “one big, beautiful bill” (i.e. the budget for 2025-26), which has already been derailed in its current form in the House by fiscal hawks in the Republican Party.  It appears that the bill includes a variety of tax reductions, with offsets coming from reductions in Medicaid and other social programmes. However, in its current (yet-to-be-approved) form, the bill is projected to massively increase the US deficit, according to the Committee for a Responsible Federal Budget in an article written May 15 that you can find here, with the graph of budget increases extracted below.

It is not really Moody’s says anyway that matters, but rather what global US Treasury investors signal. Although Mr Trump wants to blame the Fed for high interest rates, the fact is that bond investors – not the Fed – determine yields of US Treasuries at intermediate and long maturities, and these investors are speaking loudly and clearly at the moment. I suspect there will continue to be turbulence in the UST market as the budget moves through Congress. Also, should the bill get delayed, keep in mind that the Treasury is expected to run out of money (due to the debt ceiling) in August or September 2025, should something not be agreed before then. In the meantime, let’s cross our fingers that “one big beautiful bill” can be agreed before then.

Walmart’s comments regarding tariffs

Walmart’s (WMT) CFO John David Rainey said on Thursday, following the release of the company’s 1Q2025 earnings, that the company would have to raise prices of many items because of tariffs, starting in late May.  It is a logical response that has apparently been completely lost on those in the Trump Administration that have started and are continuing to promulgate the “dialled-back” trade war.  Welcome to reality, Mr Trump, who naturally pushed back, saying the following on social media:

The fact that the leader of the free world is trying to dictate corporate pricing policy at one of America’s largest and best retailers is beyond shocking to me.  Fortunately, I do not own the stock, but if I did, I would be outraged.  I suppose the good news is that WMT’s stock really didn’t respond, at least not yet, a reaction I believe shows the “sham factor” in this sort of bizarre presidential comment to “manage” the negative effects of the trade war. 

Have a good trading week!