Fitch Affirms Australia’s Rating, But Flags Mounting Budget Risks

SYDNEY—Fitch Ratings affirmed Australia’s AAA sovereign credit rating with a stable outlook, even as it highlighted that the country’s high debt relative to countries with similar ratings.

Fitch said the country retains a commitment to the same rules for fiscal sustainability that helped to underpin close to 30 years of economic expansion before the pandemic.

“Australia’s rating is underpinned by the country’s high income per capita and sound medium-term growth outlook, as well as strong institutions and an effective policy framework,” Fitch said in a statement on Monday

It warned that Australia’s fiscal metrics are set to weaken modestly in the next two years. But it anticipated deficits and overall debt would be contained over the medium term, supporting the stable outlook.

The affirmation of the top rating comes despite ongoing concerns about the pace of spending over the past year as the federal government deals with an explosion in costs linked to the national disability insurance scheme while at the same time cutting income taxes.

Government spending measures aimed at cushioning the rising cost of living on households, and falling commodity prices, will put pressure on the budget, Fitch said.

Australia’s general government deficit, which consolidates federal, state and local governments, will reach 2.6% of GDP in the 12 months through June, 2025, from 1.6% in fiscal 2024 and 0.8% in fiscal 2023, Fitch said.

“Aggregate state deficits have been high over the past couple of years, offsetting surpluses at the federal level,” Fitch said. “We also forecast deficit reduction at the state level to be gradual, given a still-large infrastructure development pipeline.”

Rising aged care and the NDIS will continue to pressure the budget, though efforts are under way to contain these costs, it added.

Fitch forecasts economic growth to slow to 1.1% in 2024, from 2.0%, but expects a gradual acceleration in activity from late this year, driving growth to 1.7% in 2025 and 2.1% 2026.

“A recovery should be supported by income tax cuts, probable monetary easing in 2025 and a healthy labor market, which should buoy household balance sheets,” the ratings agency said.

Fitch expects the Reserve Bank of Australia will start to cut interest rate cuts in February, with the policy rate reaching 3.50% by the end of next year, after being on hold at 4.35% since November 2023.

Underlying inflation appears set to trend down to the RBA’s 2%-3% target band by end-2025, from 3.5% in the third quarter, the ratings agency said.

“Still, risks tilt toward delayed cuts given persistent services inflation and a still-tight labor market, with brisk employment growth, low 4.1% unemployment rate and a record participation rate in September 2024,” it added.

Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.

When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.

The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.

But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.

Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.

After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.

“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”

The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.

Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.

In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.

Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.

“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”

Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.

“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.

The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.

In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.

Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.

Fitch Affirms Australia’s Rating, But Flags Mounting Budget Risks

General government deficit will reach 2.6% of GDP in fiscal 2025, Fitch said

Nvidia’s earnings will test Wall Street’s confidence in the AI boom.