U.S. Government Earns ‘Negative’ Outlook From S&P
The U.S. dollar is now approaching its lowest level in 30 months. Last Monday, the dollar got an extra “push” off the cliff when Standard & Poor’s issued a “negative” outlook on the United States’ AAA credit rating and cited a “material risk” that our political leaders would fail to deal with our rising annual budget deficit and escalating long-term debt burden.
S&P effectively gave the government a two-year warning to get its fiscal house in order and enact meaningful change or else suffer a credit rating downgrade. Typically, after similar warnings, the S&P issues downgrades 33% of the time within two years.
Nikola Swann, an S&P credit analyst said, “More than two years after the beginning of the recent crisis, U.S. policy makers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures.”
Adding insult to the United States, S&P said on Thursday that it has upgraded Estonia’s outlook to “positive” and said that, as a new euro zone member, Estonia’s transfer and convertibility assessment remains at AAA. So the United States has a new “negative” outlook, while tiny Estonia has a new “positive” outlook. Ouch!
I mentioned on CNBC’s “Fast Money” on Wednesday that the euro just posted its largest daily gain relative to the U.S. dollar since January, in spite of the fact that, within the euro zone, chaos reigns. Yields on 2-year to 10-year notes and bonds in Greece, Ireland and Portugal all rose to record levels last week. With Greece’s long-term bonds now yielding about 15%, a restructuring of Greek debt seems inevitable.
Naturally, the Administration is not too happy with the S&P’s negative outlook for U.S. Treasury debt. President Obama quickly dispatched Treasury Secretary Tim Geithner to appear on CNBC and elsewhere in an attempt to do “damage control.” On the air, Geithner said that there was “no risk” that the United States’ AAA credit rating would be downgraded, but that is an indefensible statement. By contrast, the co-chairman of President Obama’s own deficit commission, former Clinton chief of staff Erskine Bowles, told the Financial Times that S&P had been “absolutely right” in changing its outlook for the United States, saying that “if anything, they understated the extent of the problem,” while adding that “what we need now is action.”
Stocks Ignore Negative Economic Data
Last week’s economic indicators were mostly negative, but the stock market doesn’t seem to be paying too much attention to economic data during the peak weeks of earnings reporting season. That’s why the market continued rising after we learned that the number of new jobless claims exceeded 400,000 for the second week in a row, and the Philadelphia Fed index reached a five-month low.
In other downbeat news, March housing starts came in at just 549,000, a disappointing 13.4% below the already depressed levels of a year earlier, in March 2010. The number of existing homes sold in March 2011 told the same sad story — coming in at 11% below March 2010, according to the National Association of Realtors.
This week, we’ll have the first indication of first-quarter GDP growth on Thursday, as well as the March durable goods orders on Wednesday, and a variety of other consumer confidence and sentiment indexes. In the meantime, I expect the stock market to continue to “melt up” on persistent order imbalances.