By Samuel Indyk and Wayne Cole
LONDON (Reuters) – Treasury yields rose and U.S. stock futures slipped with the dollar on Monday due to concerns about U.S. debt and rising deficits after Moody’s downgraded its sovereign credit rating late on Friday.
European and Asian shares also fell as a mixed bag of Chinese data showed the economy there was struggling, while the White House kept up rhetorical pressure on trade partners and American businesses.
Unease over the United States’ $36 trillion of debt mounted as Republicans got closer to passing a sprawling package of tax cuts, which some estimate could add $3-5 trillion in new debt over the next decade.
“What Moody’s sees, plain and simple, is that the ballooning debt is not being addressed,” George Lagarias, chief economist at Forvis Mazars, said. “The Republican mega bill is also contributing to rising yields.”
The U.S. 10-year yield rose 11 basis points to 4.547%. The 30-year yield was up 12 bps and above 5% for the first time since April 9, the day Trump paused most of his so-called reciprocal tariffs for 90 days.
U.S. Treasury Secretary Scott Bessent used television interviews on Sunday to dismiss the Moody’s downgrade, while warning trade partners they would get maximum tariffs if they did not offer deals in “good faith”.
Bessent heads 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.
TARIFF UNCERTAINTY
“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 equivalent 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 sapped consumer sentiment, and analysts will be scouring earnings from Home Depot and Target this week for an update on spending trends.
Trump said on Saturday that Walmart should “eat the tariffs” after the world’s largest retailer said it would have to start raising prices due to the levies.
“If the president makes Walmart take the hit, that will impact their margins. It will impact the margins of a lot of other companies,” Forvis Mazars’ Lagarias said.
“If I was in the equity market, that’s what I’d be looking at, not the (Moody’s) downgrade.”
Global shares were broadly weaker. Europe’s STOXX 600 was down 0.6%, while indexes in Frankfurt, Paris and London were between 0.1% and 0.8% lower.
MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.5%, with Japan’s Nikkei down 0.7%.
Chinese blue chips eased 0.3% as retail sales missed forecasts for April, while industrial output slowed, but not by as much as feared.
S&P 500 futures slid 1.1% and Nasdaq futures 1.6%, though that followed major rallies last week in the wake of Trump’s decision to lower levies on China. [.N]
U.S. RATES NOT FALLING SO FAST
Markets are still pricing in only 49 basis points of Federal Reserve rate cuts this year, compared with more than 100 basis points a month ago. Futures imply just a 36% chance of a move by July, rising to more than 86% by September.
A host of Fed speakers are on the diary this week, including influential New York Fed President John Williams and Vice Chair Philip Jefferson on Monday. Fed Chair Jerome Powell is due to speak on Sunday.
Higher U.S. yields offered little comfort to the dollar, which fell as investors remain uneasy with the volatility of U.S. trade policy. The euro rose 0.9% to $1.1265, while the dollar slipped 0.5% to 145 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.
Euro sentiment was aided by a surprise victory for the centrist candidate in Romania’s presidential election over a far-right anti-EU opponent. The centre also fared relatively well in elections in Poland and Portugal.
The EU and Britain also agreed the most significant reset of defence and trade ties since Brexit on Monday.
In commodity markets, gold was on the rise again after shedding almost 4% last week. It traded 1.4% firmer at $3,245 an ounce. [GOL/]
Oil prices struggled on concerns about potential increased output from OPEC and Iran. [O/R]
Brent dropped 1.1% to $64.70 a barrel, while U.S. crude eased 1% to $61.85.
(Reporting by Samuel Indyk and Wayne Cole; Editing by Jacqueline Wong, Christopher Cushing, Lincoln Feast, Kevin Liffey and Andrew Heavens)
