G3 Decoupling

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G3 Decoupling - June G3 Leading Indicator Watch - Jun 8

• Clearest pattern in data remains US resilience in the face of deterioration in global growth, inflation and policy outlooks. US economic surprises remain positive, but European and Chinese economic surprises now negative.
• There are two-sided risks to US growth. Manufacturing and AI tailwinds remain but real disposable incomes are now shrinking. Positive NFP surprise was out of sync with the subdued underlying trend across the breadth of US labor leading indicators.
• Chinese domestic demand conditions remain weak, but our LEI is not yet at the very low levels it hit before the 2024 policy pivot.
• We continue to see meaningful downside risk to eurozone growth, especially if the ECB follows through on market pricing and hikes into an already deteriorating credit cycle.

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US

• Growth: Risks remain balanced, manufacturing recovering, services stabilizing
• Consumer: More headwinds to K-shaped consumer as real incomes turn negative
• Labor: Positive NFP surprise out of sync with subdued underlying trend
• Inflation: Divergent outlooks, rising headline, muted core

China

• Economy: Domestic demand headwinds + transitory supply driven inflation
• FX: Transitory supply-driven inflation, underlying trend remains disinflationary

Eurozone

• Growth: Clear downside risks, leading indicators deteriorate in unison
• Inflation: ECB trapped by their inflation mandate, hikes likely to be policy mistake