macro macro macro

Macro Insights: US economic momentum is slowing even before Quantitative Tightening begins

Macro 5 minutes to read
Charu Chanana 400x400
Charu Chanana

Head of FX Strategy

Summary:  The US economic data is worsening, and the Fed has not even started to tighten liquidity in a meaningful way yet. Starting June 1, the Fed will begin reducing the size of its balance sheet, amplifying its tightening beyond the rate hike measures. We continue to watch incoming economic data from the US to look for further signs of a slowdown after Richmond Fed survey, May services PMI and new home sales missed expectations. Fed’s communication will be key as well especially with the choppy equity markets.

Mixed US economic data raising recession concerns. The recession/stagflation rhetoric is gaining momentum, relatively more so than the inflation rhetoric which has been predominant since November now. Overnight we had a host of dismal economic data from the US including a miss in the services PMI (which is still in the expansion zone at 53.5 in May), Richmond Fed manufacturing index and new home sales. Gold has resumed its uptrend, suggesting stagflation concerns are on the rise, while Copper continues to be weak (China’s demand compression is into play as well). However, some of the other indicators of the US economy such as retail sales and Chicago Fed national activity index are still holding up well. Household balance sheets remain strong and labor markets are still robust. Even if we see a deterioration in labor markets as the Fed raises rates, the strength of the private sector balance sheets will likely smoothen the slowdown in consumption levels, thereby limiting the extent of a recession if one was to occur.

Inflation will be sticky. While the year-on-year CPI levels will be distorted by base effects, it will be more important to watch month-on-month prints to gauge how far the Fed will go with its tightening cycle. Energy prices continue to underpin underlying price pressures, and the rising food protectionism around the world also means food inflation will be sticky. China still doesn’t have a clear exit plan from its zero Covid policy and while port congestions may have passed the peaks, labor shortages are still hurting everything from production to logistics to supply chains.

Looking beyond Fed’s rate moves. Fed minutes of the May meeting are due later today. While consecutive 50bps of rate hikes remain locked over the next two policy meetings and another 25bps rate hike is fully priced in for September, the odds of a sixth 25bps rate hike in September have dropped to 37%, from 65% on Monday, following Fed Atlanta President Bostic’s comment suggesting an interest-rate pause in September. With markets being choppy, the Fed needs to be extra cautious on its communication if it intends to tighten liquidity. For instance, Powell ruling out a 75bps rate hike at the May meeting actually saw some loosening of financial conditions on the day after the meeting even though we saw the first 50bps rate hike of this cycle, which goes against the objective of demand slowdown and anchoring inflation expectations.

The warnings from consumer staples. The slew of poor retailer earnings in the past week is sending a warning sign not just on the consumers trading down or the cost pressures sustaining, but also on their inventory build-ups for these essentially defensive plays. Inventory build-up is a typical sign of a slowdown as it generally indicates drier liquidity conditions hampering demand. What this means is that the retailers will need mark-down prices going forward to clear their inventory, suggesting further earnings pressures. While strong household balance sheets may help retailers sail through with these higher inventory levels, especially after the stock outs of the last two years due to supply disruptions, it is certainly something to watch as a leading indictors of economic momentum.

US PMI May 2022
Source: Bloomberg

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (
Full disclaimer (

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.