When it comes to tackling the government's budget deficit, there are a lot of politicians in Washington who are good at talking the talk, but very few who walk the walk.

Just as Congress is trying to push through its latest tax plan, Moody's has downgraded U.S. debt. Combined with comments yesterday from Treasury Secretary Scott Bessent reminding everyone that tariffs could go back up again, that's a one-two punch that could make investors nervous this week.

In a way, the downgrade is purely symbolic. Moody's is the last of the three main ratings firms to do it. And the reasons given are obvious -- tax cuts are reducing revenue while spending continues to increase. Despite all the rhetoric about fiscal rectitude, even the latest proposal cuts taxes way more than it reduces spending -- and those spending cuts may not hold, since popular programs like Medicaid are being targeted.

Some say deficits don't matter. They're right, with one big caveat. They don't matter as long as bond yields stay low.

So far, so good. The 10-year Treasury yield is still at around 4.5% -- about the same as where it was a year ago. But if budget worries start pushing that yield up significantly, watch out. That will drive down stocks as well as bonds.

That's because higher yields reduce the relative valuation of stocks, increase companies' borrowing costs, and ultimately slow economic growth. As Friday's consumer sentiment data showed, shoppers are already worried. A warning from Walmart that prices could rise in the wake of a tariff hit does not help. Earnings from Home Depot, Lowe's, and Target this week will add some more color.

For now, deficit worries may well just be hot air in a storm that blows over. But keep an eye on bond yields to learn when all the talk gets real.

-- Brian Swint

*** Join Barron's senior managing editor Lauren R. Rublin and deputy editor Ben Levisohn today at noon when they discuss the outlook for financial markets, industry sectors, and individual stocks. Sign up here.

***

Bessent Dismisses Moody's U.S. Debt Downgrade as 'Lagging Indicator'

Treasury Secretary Scott Bessent played down worries about Moody's decision late Friday to downgrade U.S. sovereign debt from AAA status to Aa1, telling NBC News on Sunday that ratings firm actions are "a lagging indicator." He blamed federal spending during the Biden administration for what Moody's cited in its reasoning.

   -- Moody's was the last major credit-rating firm to downgrade U.S. debt, 
      warning it is on a trajectory to increase federal government spending. 
      Lawmakers are trying to extend President Donald Trump's 2017 tax cuts, 
      which could add $4 trillion to the deficit over the next decade. 
 
   -- Markets have likely absorbed some of the reaction given that the U.S. 
      hasn't had a perfect AAA rating across all major agencies for some time, 
      said Gregory Peters, co-chief investment officer at PGIM Fixed Income. He 
      expects the impact to be minimal. 
 
   -- Recent Treasury auctions show net buying of U.S. debt by indirect bidders 
      such as central banks, according to Ben Emons, chief investment officer 
      and founder of FedWatch Advisors. Weekly Japanese Ministry of Finance 
      data also shows Japan continuing U.S. Treasury purchases. 
 
   -- Trump's temporary pause of 145% tariffs on goods from China improved the 
      macroeconomic outlook considerably, reducing recession risk and helping 
      lift stock markets into positive territory for the year. But Treasury 
      yields also rose from 4.1% back to nearly 4.5%. 

What's Next: Inflation data doesn't yet reflect the higher tariff levels that were in place in China for more than a month before last week's reprieve. Higher inflation could keep Treasury yields elevated as the Fed hesitates to cut interest rates, which could also pressure U.S. stocks, Emons said.

-- Laura Sanicola and Janet H. Cho

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More Retailers Expected to Detail Effects of Tariffs This Week

Analysts will listen closely to Target, Home Depot and other retailers reporting earnings this week, especially what they say about how tariffs will affect prices. Walmart said last week that it would have to raise prices to counteract rising costs from tariffs, something President Donald Trump told it to "eat."

   -- Tariffs have been discussed on corporate earnings calls in the past two 
      months the most in a decade, according to FactSet. Along the same vein, 
      the word "uncertainty" has come up the most since 2020, the year the 
      pandemic hit. Mentions of the word "recession" are their highest since 
      the end of 2022. 
 
   -- Treasury Secretary Scott Bessent said Sunday he has spoken with Walmart 
      CEO Doug McMillon, who said last week the retailer would raise prices in 
      response to tariffs. Trump criticized McMillon's comments in a social 
      media post Saturday telling Walmart to "eat" the tariffs and stop blaming 
      them for rising prices. 
 
   -- Bessent told CNN's State of the Union that Walmart would be absorbing 
      some of the tariffs, while acknowledging that "some may get passed onto 
      consumers." But he added that inflation was down, notably in the retail 
      price of gasoline. 
 
   -- Trump has insisted that the cost of U.S. tariffs on imported goods won't 
      be borne by American consumers, despite what business leaders have been 
      saying. Last week, the Western-wear retailer Boot Barn highlighted strong 
      sales trends but also said demand -- and its margins -- could take a hit 
      from tariffs. 

What's Next: After pausing his so-called reciprocal tariffs while bilateral trade deals are discussed, Trump now says various countries will be getting letters telling them what the tariffs on their goods will be. Bessent warned tariff rates of 10% to 49% could come back for countries that don't negotiate in good faith.

-- Liz Moyer

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Tesla's Chinese Deliveries Will Be Closely Watched

Tesla has been trying to recover from a brand backlash related to CEO Elon Musk's political activities, and another reading on its progress could come this week, with an update on the electric-vehicle maker's Chinese deliveries. Wall Street is closely watching, and analysts might need to revise second-quarter sales forecasts.

   -- Musk promised in April that he would leave behind his work slashing the 
      federal government and renew his focus on Tesla, where first-quarter 
      delivery numbers fell 13% from a year earlier. Wall Street expects Tesla 
      to deliver 7% fewer cars in the second quarter than a year ago. 
 
   -- Second-quarter sales were looking weak in China in the first six weeks of 
      the quarter, based on registration data that said they fell about 26% 
      from a year ago. April sales in European markets including France, 
      Germany, and the U.K., fell about 49% from a year ago, after dropping 45% 
      in the first quarter. 
 
   -- A figure of 13,000 deliveries in China for the week would be close to 
      flat from a year ago and a sign that things are normalizing, while a 
      figure below 13,000 would make Wall Street analysts reconsider 
      second-quarter estimates. 
 
   -- General Motors is pushing to eliminate or modify California's EV targets, 
      The Wall Street Journal reported, citing a memo sent to employees. 
      California wants 35% of new car sales to be EVs or plug-in hybrids in 
      2026, and to eliminate gasoline-only vehicles by 2035. Eleven states are 
      following its model. 

What's Next: California's EV goals are lofty considering current sales penetration rates are still far below its targets. GM told Barron's in an email that it continues to focus on offering the best and broadest portfolio of vehicles on the market and that it has long supported consistency in emissions regulations.

-- Al Root and Janet H. Cho

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Crypto Industry Hopes for Victory on Stablecoins. What What Comes Next.

The crypto industry appears poised to grab its first major legislative victory as Congress moves closer to passing a bill to regulate stablecoins. Its next goal -- legislation regulating exchanges and token issuers -- might be a steeper hill to climb.

   -- As soon as today, the Senate plans to hold a key procedural vote on the 
      so-called GENIUS Act. Among other provisions, the bill would require 
      stablecoins, whose value is typically pegged to the dollar, to hold 
      reserves of liquid, safe assets such as Treasury bills. 
 
   -- Issuers would also have to follow anti-money-laundering and terrorism 
      finance rules and give holders of coins priority to recoup their money in 
      a bankruptcy. Stablecoins, with a market value of $250 billion, underpin 
      most of the $3.3 trillion market for Bitcoin and other crypto tokens. 
 
   -- The largest stablecoin, called USDT, is issued by Tether Holdings. 
      U.S.-based Circle Internet Financial issues USDC, the second-largest 
      token, which was founded in partnership with crypto trading platform 
      Coinbase Global. Currently used mostly for trading, issuers think 
      stablecoins could challenge traditional payments networks. 
 
   -- There are some issues with the industry's push. First is the potential 
      for big technology companies like Meta Platforms to issue their own 
      stablecoins. Second is President Donald Trump. He and his family could 
      profit from majority ownership of stablecoin issuer World Liberty 
      Financial. 

What's Next: The crypto industry has a separate push to approve legislation that would regulate crypto exchanges like Coinbase Global and crypto token issuers. Trump has been more crypto friendly than the Biden administration, but the industry is concerned regulation will get stricter without rules around how they are policed.

-- Joe Light

***

Buffett Won't Be on Stage Next Berkshire Meeting: Report

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