Transitory US Inflation vs Fragile Eurozone Growth - Weekly Wrap

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Transitory US inflation vs fragile Eurozone growth - May G3 LIW

• There is a notable split among the G3. US growth remains resilient, and while US headline CPI has risen due to the Iran conflict, core inflation pressures are muted and likely transitory.
• In contrast, Eurozone leading indicators are deteriorating in unison, while the ECB is at risk of a policy error due to its price stability mandate.
• Major global growth decelerations typically require both hard economic data and financial markets to deteriorate simultaneously to create self-reinforcing feedback loops. This condition is not met today, as credit spreads remain tight.
• The primary second-order risk resulting from Iran is that global central banks tighten policy in sync in 2H26. A synchronized global tightening cycle could drive a simultaneous deterioration in hard economic data and a drawdown in risk assets.

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Summary

• Global: Global growth risks balanced with slight negative bias, G3 economic surprises diverge

US

• Growth: Steady growth outlook: resilient manufacturing, softening services
• Consumer: Muted real disposable income growth, headwinds starting to build
• Labor: Not yet recessionary, not yet inflationary
• Inflation: Headline inflation mechanically higher, but core inflation pressures are mute.

China

• Growth: Outlook muted, policymakers remain reluctant on stimulus for households
• Inflation: Transitory supply-driven inflation, underlying trend remains disinflationary

Europe

• Growth: Notable downside risks, as leading indicators deteriorate in unison
• Inflation: Notable upside risks, as ECB is stuck and at risk of 2011-style policy error  

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