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SPI Management Newsletter 04.08.23

Fitch Downgrades US Debt Rating from Triple A to Double A Plus After Borrowing Stand-Off

Fitch Ratings has downgraded the US debt rating from AAA to AA+, a significant move influenced by escalating fiscal troubles and governance issues. The decision comes two months after intense political conflict nearly pushed the world's largest economy to the brink of a sovereign default. Fitch's downgrade reflects its concerns about "expected fiscal deterioration over the next three years" and a "high and growing general government debt burden." Additionally, the agency pointed to an "erosion of governance" over the past two decades marked by recurring debt limit confrontations and last-minute resolutions.

The recent political brinkmanship culminated in a narrow avoidance of a default, with Washington reaching a deal to raise the federal borrowing limit just in time. This agreement came after Fitch had warned of a potential downgrade, citing "increased political partisanship" that hindered resolution. The move by Fitch is notable as it is one of three major rating agencies whose opinions are closely followed by global market participants. Meanwhile, Moody's still maintains a AAA rating on the US, and S&P reduced its rating to AA+ in 2011 after a previous debt ceiling showdown. Despite the news, markets for US Treasury bonds and the dollar index remained largely unaffected.

US Treasury Secretary Janet Yellen expressed strong disagreement with Fitch's decision, labeling it "arbitrary" and accusing the agency of relying on "outdated data." She pointed out that despite progress in various economic indicators, Fitch chose to announce its change now. Lawrence Summers, a former Treasury Secretary, also criticized the downgrade, terming it as "bizarre and inept," especially as the economy appears stronger than expected.

Fitch also mentioned a rising US debt burden as a cause for concern and projected the general government deficit to escalate to 6.3% of GDP in 2023, from 3.7% in 2022. The agency forecasts growth in the US to be constrained by a predicted recession in the fourth quarter of 2023 and the first quarter of 2024.

While lower credit ratings usually lead to higher borrowing costs in debt markets, experts remain unsure about its application in this instance. After S&P's prior removal of the US's AAA rating, there was minimal long- term market effect.

Amazon’s Online Sales Surge Boosts Earnings and Sends Shares Upwards as Apple Stumbles

Stronger-than-expected online sales and a rebound in its cloud computing division, Amazon Web Services (AWS), propelled Amazon's sales and earnings beyond Wall Street's predictions in the latest quarter. Revenue growth in AWS increased to 12% for the second quarter, beating analysts' forecasts and indicating a potential recovery in the cloud division. Amazon's CFO Brian Olsavsky spoke of a "stabilization" in the cloud business, highlighting the rising demand for new computing workloads. Significant cost-cutting measures, including large-scale layoffs, also contributed to Amazon's profit margins. Nearly 27,000 jobs were shed, and the increased use of contract workers provided greater flexibility.

Amazon’s operating profit margin grew by 3 percentage points to 5.7%, well ahead of expectations. CEO Andy Jassy cited the company's regionalization of its logistics networks, leading to lower delivery costs, as a factor in strengthening margins. Amazon's share price rose more than 9% in after-market trading, extending its 50% rebound this year. Excluding currency fluctuations, revenue from Amazon's online stores grew 5% to $53 billion in the quarter, beating the anticipated 3.5% growth. Despite continued pressure on consumer spending, Amazon has managed to adapt to shifting spending patterns, with its wide product range and same-day delivery option playing crucial roles. Overall, the US e-commerce giant reported an 11% increase in revenue to $134.4 billion and earnings per share of 65 cents, in contrast to a loss of 20 cents the previous year, surpassing Wall Street's expectations for revenue of $131.5 billion and earnings per share of 35 cents.

Apple's fiscal third quarter saw an increase in services, beating Wall Street expectations, but overall sales fell 1% to $81.8 billion. This decline was attributed to drops in iPhone, iPad, and Mac revenue. With a potential 1% drop forecast for the next quarter, shares dipped 2% in extended trading.

Adapted from WSJ, FT, NYT, Reuters, CNBC, Bloomberg

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