US Macro Watch – institutional-grade tracking of the world’s largest economy

US growth has decisively outperformed the 2024 consensus, with real GDP expanding at an annualised 3.0% in the latest print after a brief Q1 contraction tied to a one-off inventory drawdown and tariff-induced import front-loading. The composition matters: roughly two-thirds of GDP growth over the last four quarters has come from personal consumption, with non-residential fixed investment – particularly intellectual-property products (software, AI capex) – contributing meaningfully on top. Government consumption and gross investment, swollen by the IRA and CHIPS Act, has been a quiet but persistent tailwind.

The drag from net exports and residential investment is real but contained. Housing starts have stabilised in the 1.4–1.5m SAAR range as builders refuse to break the 30Y mortgage rate logjam at higher prices. Our nowcast methodology – weighting hard data flow (retail sales, durable goods, ISM new orders, payrolls) into a Kalman-filtered current-quarter estimate – currently lands at ~3.0% Q3 SAAR, materially above the FOMC’s 1.8% long-run estimate. The implication: the output gap remains positive, the labour market is still cooling but contained at 4.3% unemployment, and the Fed has less room to cut than the curve is pricing.

The disinflation story has cracked. April CPI (May 12 release) printed at 3.8% YoY headline and 2.8% core, a sharp re-acceleration after seven months of grinding sideways. Headline was hit by a war-driven energy spike (+0.6% m/m headline vs +0.4% core m/m). Even more striking: PPI Final Demand jumped to 6.0% YoY in April (May 13 release), the largest print since Dec 2022, with core PPI at 4.4% YoY (largest since Feb 2023) and services PPI up 1.2% m/m. Energy PPI rose 7.8% m/m. The pass-through from pipeline costs to CPI is the dominant macro risk for H2 2026.

The split between goods and services still matters, but it has been overtaken by the cost-push shock. Wage growth at 3.6% YoY (Apr AHE) sits comfortably above the 3% threshold consistent with 2% target inflation, and unit labour costs running near 2.5% remain the floor on services inflation. With the PPI services line accelerating, supercore CPI will be the next leg up – we expect Core CPI to drift toward 3.0%+ in the May/June prints if the energy shock holds.

For the Fed, this is the worst possible reaction-function setup. The FOMC has held at 3.50–3.75% for three consecutive meetings (most recently April 29 2026); cuts that the curve was pricing for Q2 are being pushed firmly into Q4 2026 or beyond. Powell’s next move is the June 17 2026 meeting. The 5Y breakeven has decompressed from 2.3% to ~2.55% on the April prints, the first material widening since 2022 – the inflation-expectations victory we declared last year is at risk. We are positioned for no cuts in H1 and at most 25 bp in H2 2026.

The US labour market is loosening but not breaking. Unemployment at 4.3% (April 2026, NFP +115k) has drifted up from the 3.4% cycle low, but the increase has been driven more by labour-supply expansion (immigration, prime-age LFPR recovery) than by layoffs. Initial claims hovering in the 225–240k range are consistent with a hiring slowdown, not a layoff cycle. NFP has decelerated from a 2022 average of ~400k/month to a trailing 3M average closer to 100–150k – cooler, but well above the breakeven needed to absorb labour-force entrants.

The wage signal is the one we’d watch. Average hourly earnings have rolled from 5.5% YoY in 2022 to around 4% currently; if Atlanta Fed’s wage-growth tracker drops below 4% sustainably, that’s the green light for the Fed. Quits rate at 2.0–2.1% is back to 2018–19 norms – workers are no longer job-hopping for 15% raises – which is the labour-market mechanism by which wage growth eventually cools. Net: a soft landing remains the central case for the labour market, but the margin of safety is thinner than the headlines suggest. The Sahm rule, with its 0.5 pp threshold, has flashed in the past but hesitates here because the unemployment rise has come via labour-supply expansion rather than layoffs.

The FOMC sits in the most uncomfortable spot of any cycle in the last 20 years. Policy now sits at 3.50–3.75% after three consecutive holds (March, May and April 29 2026), just barely above neutral estimated at 3.0–3.5%. The real ex-ante rate – nominal funds minus core CPI of 2.8% – sits around 0.9%, only mildly restrictive. The realised pass-through to credit is therefore much weaker than the headline funds rate suggests, and with the April inflation surprise the Fed has zero room to start cutting before evidence the energy shock is unwinding. Markets have pulled the first cut from June to October 2026.

On the balance sheet: QT runoff continues at roughly $35bn/month in Treasuries and $35bn/month in MBS, with the announced taper preserving optionality. Reserves at $3.0–3.2tn are getting closer to the “ample” floor that triggered the 2019 repo blowup – the standing repo facility provides a backstop, but we expect QT to wind down by mid-2026. The yield curve has bear-steepened sharply on the April inflation surprise: 10Y-2Y back to +97 bp with the 10Y at 4.59% (May 15), a one-year high. Bear-steepening into a Fed hold (not into cuts) is the unusual feature – it means term-premium decompression is doing the lifting, not policy expectations.

The dollar story has flipped: DXY at 98.3 (May 12) reflects the dollar finding a floor as the rate-differential narrative reverses. With the Fed now holding longer than expected on the inflation surprise – while ECB and BoE press ahead with cuts – rate spreads have widened back in favour of USD. We have moved to a neutral USD stance and are watching for a DXY break above 100 as confirmation that the inflation regime shift is real and durable.

The US has run a current account deficit of 2–4% of GDP for two decades and remains the world’s capital-importing economy of last resort. The good news: in dollar terms the goods trade deficit has stabilised around $80–90bn/month, helped by the LNG export boom, shale oil exports, and Boeing’s aircraft deliveries. The bad news: the services surplus has narrowed as IP-services exports face structural pressure and post-pandemic travel surplus normalises.

The net international investment position has widened to a $22–24tn liability – roughly 80% of GDP – but this is largely a valuation story (US equity outperformance lifting foreign-held US assets) rather than a borrowing story. The constraint binds only if foreign appetite for US debt softens; with the Fed near peak and dollar exceptionalism re-pricing, demand at recent auctions has been steady but tail risk on the long end is real. Watching Japanese and Chinese Treasury holdings closely as a sentiment proxy.

US equities are richly priced but supported by an unusual combination of resilient earnings, AI-narrative-driven multiple expansion, and an absence of fundamental cycle deterioration. Trailing S&P 500 P/E around 22× sits in the 80th percentile of the post-1990 range; ex-megacap tech, the equal-weighted index trades closer to 17×, which is more digestible. The catalyst for de-rating is binary – a clean 10%+ correction either needs a meaningful labour-market crack or a rates-driven liquidity event. Neither is in our base case for the next two quarters.

The credit market is the more honest barometer. IG spreads near 90–100 bp and HY around 300–350 bp sit in the tightest decile of the post-GFC period – pricing zero recession probability. We treat compressed spreads as a warning, not a confirmation: when spreads can’t go any tighter, the convexity of the trade is asymmetric and the carry-to-risk ratio is unattractive. Our positioning has shifted defensive in credit while staying neutral in equities. VIX backed up into the low-20s after the April CPI/PPI surprise (vs low-teens through Q1) – a market that had priced in near-perfection getting re-acquainted with macro tail risk. We expect implied vol to stay elevated through the June FOMC.

The Street consensus has now been re-anchored around 1–2 Fed cuts in 2026 with the first push slipping to October. We think even that is too dovish after the April CPI/PPI prints. Our non-consensus call: the Fed will not cut at all in 2026 if PPI services pass-through into core CPI runs as we expect through June/July. The “new neutral” sits at 3.50–3.75% (i.e., where we are today), the real terminal rate post-cuts is barely restrictive, and the term-premium repricing on the long end has further to go. For asset allocators, this means real assets (gold, commodities, real-asset equity sleeves, inflation-linked bonds) deserve a structural overweight versus what 60/40 frameworks would suggest – the next macro regime looks more like the 1970s than the 2010s.

The second non-consensus call: AI capex is more concentrated and more cyclical than the equity market is pricing. Hyperscaler capex of $250bn+ this year is real, but it sits in ~5 names and is tied to monetisation paths still being proven. A 25–30% cut in 2026 capex guides – entirely possible if AI revenue conversion lags – would knock out a meaningful tail of GDP contribution and re-rate Nasdaq down by ~15%. We don’t base-case this, but we ensure our equity exposure can survive it.

The third: the Treasury market is the cycle’s pressure valve. With deficits running 6–7% of GDP and refunding sizes setting fresh records, the term premium has further to decompress on supply alone. A 50 bp move higher on the long end without a corresponding move at the front end is the scenario that breaks the rates-down/equities-up consensus – and it’s the trade we’d position for at current implied vol.