4 months ago • 4 mins
The US was stripped of its top-tier government debt rating last week by Fitch, which criticized the country’s bloating budget deficit – the gap between outgoings and revenue – and an “erosion of governance” that’s led to repeated clashes over the debt ceiling in the past two decades. The cut, resembling a move made in 2011 by S&P Global Ratings, comes two months after political confrontations nearly pushed the world's biggest economy toward a default on its debt.
Apple posted its third straight quarter of declining revenue and predicted a similar performance for the current period, citing slumping demand for phones, computers, and tablets. But the firm’s ultra-profitable services business came through, counting one billion paying subscribers worldwide and helping lift Apple’s profit by 2.3% from a year ago – defying investor expectations for a 3.6% drop.
Meanwhile, Amazon’s revenue returned to double-digit growth last quarter, outdoing investors’ expectations. That’s mainly thanks to stronger-than-expected online sales and signs that the worst may have passed in its slowing cloud computing division. Layer that plump revenue onto cost-cutting measures like large-scale lay-offs earlier this year, and Amazon’s buoyed-up profit margins led to after-tax earnings that were nearly double expectations.
In the UK, the BoE raised interest rates by a quarter of a percentage point, taking them to 5.25% – their highest level since 2008. The central bank had previously raised rates by half a percentage point at its last meeting a couple of months ago, and traders saw a 33% chance of a similar move this time around too. But a bigger-than-expected fall in the UK’s inflation rate in June probably gave policymakers the confidence they needed to opt for a smaller move.
After sinking into a mild technical recession in March, the eurozone economy returned to growth in the second quarter, expanding by 0.3% from the previous three months – slightly ahead of the 0.2% expected by economists. A 3.3% uptick in the Irish economy pulled up the average, while Germany – Europe’s biggest economy – still lagged behind.
Activity in China’s manufacturing sector shrank in July, offering fresh evidence that the country’s economic momentum is losing steam. The Caixin manufacturing purchasing managers index (PMI), a measure of manufacturing activity in Asia’s biggest economy, declined to a six-month low of 49.2 in July from 50.5 in June, below the key 50 level that marks a contraction. Around when the poor showing was revealed, the government pledged initiatives to awaken the country’s slumbering economy.
Tax cuts and fresh spending programs, along with several economic upheavals, have inflated the government's budget deficit. Now it’s expected to hit $1.39 trillion for the first nine months of the current fiscal year – an increase of approximately 170% compared to the same time last year. That’s partly due to rising interest rates and the US’s rapidly swelling debt pile, which Fitch forecasts to reach 118% of the size of the country's economy by 2025 – over three times higher than AAA-rated countries’ median of 39%.
The US Treasury Department has had to sell more bonds in a bid to bridge the burgeoning deficit. That could be why it recently increased its net borrowing estimate for the July-to-September quarter to $1 trillion, a significant leap from the $733 billion it had predicted in early May. But such a move would only exacerbate the US's already ballooning debt pile at a time when interest rates are climbing higher, leading to bigger interest payments and a further widening of the budget deficit. This vicious cycle may explain why some heavyweight hedge fund names – like Bill Ackman – are starting to bet against US government bonds.
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