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AUGUST 2, 2023

DEBT DOWNGRADED

Fitch Ratings recently downgraded the U.S. government debt from AAA to AA+, citing concerns about tax cuts, new spending initiatives, economic shocks, and political gridlock. The downgrade comes following concerns about increasing fiscal deficits and the potential impact on the economy, markets, and next year’s presidential election; and it has caused criticism from Washington and Wall Street. Treasury Secretary, Janet Yellen, pushed back against the downgrade, calling it “arbitrary” and “outdated,” noting the recent resilience of the economy and the resolution of the debt limit issue. In the meantime, the bond market has not reacted significantly to the downgrade, but risk-sensitive assets took a hit. Moreover, the downgrade has sparked political arguments, with Democrats blaming Republicans for the debt ceiling issues and Republicans criticizing President Biden’s spending agenda.

CRYPTO TAX SETBACKS

The Treasury Department is experiencing setbacks in implementing a crucial law to combat tax evasion in the cryptocurrency sector, jeopardizing billions of dollars in federal revenue and causing frustration among members of the president’s own party. Initially, the department missed the deadline to implement the law for the current tax year, and now, due to further delays, it may be too late to enforce it for the 2024 tax year. The law aimed to raise $28 billion over the span of ten years by closing loopholes that enable crypto investors to evade taxes. The administration’s objective is to ensure that crypto investors abide by the same rules as others. Sensing the urgency, Senator Elizabeth Warren and three other senators are urging the Biden administration to expedite the process. The concern is that tax evaders and crypto intermediaries willing to assist them will exploit loopholes and syphon off billions of dollars annually if given the chance. Despite the Treasury Department and Internal Revenue Service announcing in December that brokers would not need to report any information until final rules were issued, the department has yet to issue a proposal or make any progress, adding months, if not years, to the timeline before final rules come into effect. Treasury spokeswoman Kristin Lynch assures that the department is working diligently to issue these critical and intricate regulations promptly. However, the delay itself has become a more significant issue, overshadowing the regulations themselves. Experts warn that commencing implementation for the 2024 tax year would be ambitious considering the time required for brokers to establish and test the necessary reporting systems.

STRONG JOB GROWTH

In July, the private sector exceeded expectations by adding 324,000 jobs, as reported by ADP, driven primarily by a remarkable surge in leisure and hospitality positions, surpassing the Dow Jones consensus estimate of 175,000. These figures highlight the impressive resilience of the U.S. job market despite the Federal Reserve’s efforts to control inflation and slow economic growth. Job creation was mainly dominated by services-related industries, while goods producers experienced a more modest increase, and manufacturing saw a loss of 36,000 jobs. Additionally, ADP observed a year-over-year wage increase of 6.2%, albeit the slowest growth since November 2021. Notably, job gains were concentrated in smaller firms, with those having fewer than 50 employees contributing 237,000 positions, while larger companies The report serves as a preview of the Bureau of Labor Statistics’ nonfarm payrolls count, which might show different job counts. experienced a net loss of 67,000 jobs.

HIGH MORTGAGE RATES

According to the Mortgage Bankers Association, mortgage rates have been persistently high for several weeks, posing challenges for homebuyers. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances increased to 6.93% from 6.87%, pushing affordability to tougher levels. As a result, mortgage applications to purchase a home fell by 3% compared to the previous week and were 26% lower than a year ago. Additionally, applications for refinancing home loans also declined by 3% and were 32% lower than the same week one year ago. Joel Kan, an MBA economist, attributed the decrease in purchase activity mainly to weaker conventional purchase application volume due to limited housing inventory and rates remaining close to 7%, constraining affordability for many potential homebuyers. Looking ahead, mortgage rates began this week higher and could further rise ahead of the monthly employment report, with concerns that rates may reach 20-year highs if economically bullish data is realized, as cautioned by Matthew Graham, chief operating officer at Mortgage News Daily.

MIXED TREND CONTINUES

Mixed performances continue to be evident in the latest earnings reports, with CVS Health delivering positive results for the second quarter. Despite a 37% decline in net income from the same period last year, the company reported adjusted earnings per share of $2.21, beating expectations. CVS maintained its full-year adjusted earnings guidance and saw revenue growth in both the health services and retail pharmacy divisions. On the other hand, Yum Brands faced challenges as its quarterly earnings fell short of expectations, despite a sales rebound in China for KFC and Pizza Hut.

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