Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at Moody’s Treasury downgrade, BoE rate cuts, and Starmer’s benefit cut reversal. 

But first, our number of the week…

£100 million

This week, Sidekick reached a major milestone: £100 million in client assets on the platform. We’re extraordinarily grateful to every client that has entrusted us with their hard-earned money and strive to keep earning that trust each day. Here’s to the next £100 million!

Now to our main stories…

Only have a minute to read? Here’s the TL;DR:

• In a controversial move, Moody’s decided to downgrade US Treasuries from their triple-A status. It’s the latest sign that Treasuries could be losing their luster as the world’s safest asset, especially given the dollar’s uncertain future.
• The BoE’s chief economist urged the central bank to slow the pace of rate cuts this week owing to price stability risks. With UK CPI unexpectedly climbing to 3.5% in April, BoE policymakers will likely be more cautious about cuts moving forward. 
• In a long-awaited reversal, Keir Starmer confirmed that the government would adjust planned cuts to winter fuel payments. However, with Rachel Reeves refusing to budge on the government’s fiscal rules, more sweeping changes are unlikely. 

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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Losing Its Luster: Moody’s Downgrades US Debt

Last Friday, Moody’s made the controversial decision to downgrade the credit rating on US Treasuries from triple-A status.

Moody’s will now rate US government debt as Aa1, the second-highest level under the firm’s framework. 

While Friday’s announcement was unexpected, Moody’s is actually the last of the big three agencies to remove America’s perfect credit rating. S&P and Fitch downgraded Treasuries in 2011 and 2023, respectively. 

In the near term, Moody’s decision is unlikely to disrupt markets. In the long term, however, it’s the latest sign that Treasuries are starting to lose their luster as the world’s safest asset.

Treasuries benefit from dollar’s reserve status

In making their decision, Moody’s largely focused on the American government’s fiscal position:

• The US runs substantial budget deficits, amounting to over 6% of GDP in 2024. That has pushed the country’s debt-to-GDP ratio to over 120%.
• In a statement, Moody’s noted that while the company recognises America’s economic strengths, these advantages ‘no longer fully counterbalance the decline in fiscal metrics.’
• Despite these fiscal metrics, international demand for US Treasuries has remained strong, with foreign holdings amounting to over $9 trillion. 

Because the dollar serves as the world’s reserve currency, many countries have little choice but to hold dollar-denominated debt.

But if the dollar loses this reserve status, Treasury demand could dry up – and America’s fiscal position could look far more risky.

Sidekick Takeaway: The sustainability of America’s fiscal position, and thus the safety of Treasuries, appears closely tied to the dollar’s reserve currency status. With ample uncertainty over the dollar’s future, Moody’s downgrade is a sign of the times. 

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Chill Pill: BoE Economist Urges Bank to Slow Cuts

Earlier this month, the Bank of England (BoE) decided to implement a small interest rate cut, bringing its key rate to 4.25%.

Given the bank’s recent trajectory, this isn’t unusual. The BoE has cut rates four times since summer 2024.

What is unusual, though, was the internal division over the move.

The rate cut followed an unusually close 5-4 vote. Typically, BoE votes achieve a near-consensus.

Now, one of the dissenters is publicly voicing his frustration. 

In a speech this week, BoE chief economist Huw Pill stated that the pace of the bank’s cuts ‘is too rapid’ given inflationary risks. 

Inflation jumps following Pill’s speech

Shortly after Pill’s speech, inflation data seemed to justify his concerns.

In April, UK CPI figures jumped 3.5%, far more than expected and the highest increase in over a year.

That follows figures showing that wage growth has been unusually elevated, amplifying underlying price pressures.

This data certainly complicates the BoE’s approach. On the other hand, the bank could have more room to maneuver given recent stronger-than-expected growth figures. 

Overall, the BoE seems unlikely to pause rate cuts entirely. But the anticipated pace of those cuts is almost certain to slow.

Sidekick Takeaway: While inflation mostly reflects economic factors, there was a political component to the latest CPI numbers, with evidence indicating that employers passed through recent tax increases. That’s a tricky result for Labour, whose fiscal policies recently earned strong backlash at the polls.

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U-Turn: Starmer Confirms Winter Fuel Cut Reversal

After disappointing election results earlier this month, Labour has been widely expected to review a suite of unpopular fiscal policies.

Some of this pressure has come from within Labour’s own ranks. Several party PMs have publicly urged the government to reconsider benefit cuts.

After repeatedly denying any planned changes, Labour now looks set to reverse course.

This week, Chancellor Rachel Reeves hinted that changes could be coming, especially to cuts to winter fuel payments for pensioners.

Just days later, Labour leader Keir Starmer all but confirmed the changes. The PM noted a plan to adjust the threshold to allow ‘more pensioners’ to qualify for benefits again.

Still, more sweeping adjustments could be limited by the government’s self-imposed fiscal constraints. 

Fiscal rules make big spending changes unlikely

Despite potential changes to Labour’s benefit cuts, the party has so far ruled out more substantive adjustments to fiscal policy:

• Labour has committed to following a suite of self-imposed rules to guide government spending, including that borrowing should not be used to fund day-to-day spending.
• So far, Reeves has categorically denied adjustments to these rules, stating that they are not up for negotiation.
• As a result, substantive measures like large departmental spending cuts are unlikely to change.

Despite these rules, government borrowing rose to £20.2 billion in April, up £1 billion from the same period last year.

That’s raised fresh concerns that tax increases may be necessary come autumn. Needless to say, tax increases would further imperil Labour’s popularity.

Sidekick Takeaway: Although it’s a positive step, adjusting fuel cuts without addressing the government’s fiscal rules misses the forest for the trees. So long as the rules remain in place, further spending cuts or tax rises may be necessary if the UK economic outlook worsens.

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Notices

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern St, London, EC2A 3EJ.

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