Moody's, Fitch Issue Mixed Reports On Condition Of US Economy

Stocks were trading higher Wednesday after new reports from credit ratings agencies Moody’s and Fitch contained some mixed commentary on the overall health of the U.S. financial system.

No Imminent Recession

The flatter yield curve that has grabbed the attention of Wall Street in recent weeks isn’t necessarily an indicator of an imminent recession, according to Fitch.

“The underlying recession signals traditionally embodied by a yield curve inversion, namely high policy interest rates relative to long-term expectations of policy rates, falling bank profitability and credit availability, are absent,” Fitch said Wednesday.

Yet a flattening yield curve is an indicator that the current economic cycle is in its late stages, Fitch said. An inverted yield curve has been a leading indicator of each of the past nine U.S. recessions.

Fitch is forecasting a year-end 2018 10-year Treasury yield of 3.1 percent, suggesting a sharp recovery from recent levels of around 2.85 percent. The firm also predicted the Fed Funds rate and the 10-year Treasury yield will rise in tandem throughout 2019.

Long-Term Deterioration

While Fitch eased investor fears about the short-term outlook for the U.S. economy, Moody’s said the longer-term outlook is not quite as rosy. Vice president and senior credit officer William Foster said Wednesday that rising federal deficits, a ballooning national debt and rising borrowing costs will cause the U.S. fiscal strength to continue to deteriorate in the years ahead.

“Our projections continue to point to a slow but persistent deterioration in the U.S. fiscal strength over the next 10 years, as the federal debt burden grows and debt affordability declines,” Foster wrote.

Foster said a divided Congress beginning in 2019 will not have a significant impact on the long-term outlook for the U.S. economy given that budgetary issues are not a primary concern for either party at the moment.

The bullish near-term commentary may have helped ease investor fears. The SPDR S&P 500 ETF Trust SPY was trading higher by 1.54 percent at the time of publication Wednesday.

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