On the US Downgrade and July Jobs Report

The Fitch downgrade of US Treasury debt changes no facts on the ground. It was signaled clearly by Fitch earlier in the year, and for that matter just piles on to what Standard & Poor’s already did 12 years ago. Perversely Fitch upgraded the US about a year ago, and objective debt conditions now are no worse. Long yields were already rising, the most recent leg up likely associated with the long-expected tentative adjustment to BOJ yield curve control policies. This comports with our secular vision of higher yields associated with lower equity risk premia, as the age of globalization ends and the global economy continues to expand briskly out of the pandemic lows. Payrolls missed a little, and the prior two months were revised lower. But other labor market statistics were all stronger, implying that payrolls are an anomaly. July and June are the smallest payroll gains since the Delta variant-driven contraction of December 2020, they are still evidence of job market strength, with twice as many new jobs as the number of organic new workers. Strong wage gains will spook the Fed, and July inflation will report relatively poorly. The best we can hope for Powell at Jackson Hole is a signal of no hike in September. We will have to wait for that FOMC for the all-clear signal that this hiking cycle ended in July.