MACRO OUTLOOK

Rolling recession may shift to services

• Services the last leg of global growth is starting to slow. Manufacturing, trade, and some housing markets have been in recession, while services has been resilient. The drop in service Purchasing Manager Indices (PMIs) in June is a noticeable change that may indicate the rolling recession is starting to filter through to the services economy.

• Global inflation appears to have peaked, but core inflation has remained sticky. If global inflation and economic growth decline less than anticipated, central banks may have to keep rates higher for longer and postpone the start of rate cuts.

• Inflation metrics are diverging. Headline inflation metrics have continued to ease, but price-growth indices contain divergences. The Federal Reserve’s preferred gauge of underlying price growth the core services ex-housing component of the personal consumption expenditures (PCE) deflator increased by 4.5% through May. That annual increase is roughly in line with the average over the past six months (which shows little improvement) and is too fast for the Fed’s comfort.

• Economic momentum strengthened in Q1. First-quarter U.S. gross domestic product (GDP) growth was revised higher from 1.3% (quarter-over-quarter annualized) to 2%, driven by trade and services consumption. Residential investment was still negative, but the decline was less severe relative to the prior quarter; business investment was positive, but momentum waned.

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