Unease over the United States’ $36 trillion of debt has also mounted as Republicans seek to approve a sweeping package of tax cuts, which some estimate could add $3 trillion to $5 trillion in new debt over the next decade.
U.S. Treasury Secretary Scott Bessent used television interviews on Sunday to dismiss the downgrade, while warning trade partners they would be hit with maximum tariffs if they did not offer deals in “good faith”.
Bessent is off to a G7 meeting this week for more talks, while U.S. Vice President JD Vance and European Commission President Ursula von der Leyen met on Sunday to discuss trade.
“It remains to be seen whether the 10% reciprocal rate – excluding Canada and Mexico – will broadly remain, or will go up or down for some countries,” said JPMorgan economist Michael Feroli, who estimates the current effective tariff of around 13% was equal to a tax rise worth 1.2% of GDP.
“Beyond disruptions from higher tariffs themselves, policy uncertainty should additionally weigh on growth.” The tariff war has weighed heavily on consumer sentiment and analysts will be scouring earnings from Home Depot and Target this week for an update on spending trends. The impact of the trade standoff with China could be a little clearer when Beijing releases April data on retail sales and industrial output later on Monday. Analysts are looking for a slowdown in both, though forecasts vary widely.
In markets, MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.2%, with Japan’s Nikkei down 0.6%.
DOLLAR DOUBTS
S&P 500 futures eased 0.7% and Nasdaq futures lost 0.8% in early trade, though that followed major rallies last week in the wake of President Donald’s Trump decision to lower levies on China.
Yields on 10-year Treasuries rose another 4 basis points to 4.48%, extending Friday’s reversal on the Moody’s news.
Markets are still pricing in only 53 basis points of Federal Reserve rate cuts this year, compared to more than 100 basis points a month ago. Futures imply just a 33% chance of a move by July, rising to 72% by September.
Higher yields offered little comfort to the dollar, which was drifting lower amid investor unease with the volatility of U.S. trade policy. The euro edged up 0.2% to $1.1188, while the dollar slipped 0.3% to 145.19 yen.
In an interview published over the weekend, European Central Bank President Christine Lagarde said the dollar’s recent decline reflected a loss of confidence in U.S. policies and this could benefit the euro currency.
In commodity markets, gold was on the rise again after shedding almost 4% last week. The metal was trading 1.2% firmer at $3,241 an ounce.
Oil prices were steadier for the moment having been weighed by the risk of increased output from OPEC and Iran.
Brent inched up 6 cents to $65.47 a barrel, while U.S. crude added 15 cents to $62.64 per barrel.
