Firm expansion as U.S. inflation accelerates again

This week's macro picture keeps a clearly expansionary tone, but with a growing warning: prices are accelerating again in the United States while the rest of the cycle indicators remain solid.

None of the classic indicators that tend to precede recessions is triggered. The Sahm rule reads just 0.07 pp, well below the 0.50 threshold; the 10-year–3-month curve is positive at 70 bp; jobless claims are down 6% year over year; business credit is growing strongly; financial conditions are loose; housing is not collapsing and high-yield credit shows no stress (271 bp). Taken together, the cycle signals point to a continuation of the expansion.

This is the source of tension. U.S. CPI rose to 3.7% year over year in June, accelerating 0.4 pp over three months. More striking is the PCE, which jumped to 4.1% year over year, a 1.2 pp acceleration over three months. In the euro area, the HICP stands at 2.8% year over year, with a slight 0.2 pp pickup over three months. The direction is upward in both blocs, with the United States clearly running hotter.

The labor market is holding up. The unemployment rate is at 4.2%, even 0.1 pp below three months ago, and payrolls added 57,000 jobs in the month. The Sahm rule gives no signal (0.07 pp, with a three-month average unemployment rate of 4.3%) and weekly jobless claims remain contained at 214,000 on a four-week average, 6% lower than a year ago.

Credit is flowing normally: business credit is up 8.0% year over year and consumer credit 2.1%. Delinquencies remain at low levels with minor moves: mortgage delinquency rises to 1.89% (+0.12 pp in a year), business to 1.34% (+0.05 pp) and card delinquency falls to 2.92% (−0.14 pp). Financial conditions as measured by the NFCI stand at −0.54, that is, loose and below their historical average.

Activity is holding firm. Industrial production is up 1.1% year over year and retail sales advance a robust 6.7%. In housing the data are mixed: permits fall 2.3% year over year, but starts rise 3.5%, with the 30-year mortgage at 6.55% (−0.20 pp in a year). Manufacturing surveys, which tend to lead the cycle, are clearly expansionary: Empire State at +15.6 and Philly Fed at +41.4. The weak point is consumer confidence, sunk at 44.8 (−7.4 in a year), a level historically associated with recessionary territory despite the healthy pace of spending.

No recent changes. The Fed holds the federal funds rate at 3.63%, flat over the past month and 0.01 pp below three months ago. The ECB has its deposit facility at 2.25%, unchanged over the past month after the 0.25 pp rise accumulated over three months.

The system is gaining liquidity. Net liquidity stands at $5,987bn, up 2.4% over four weeks and 0.5% over thirteen. The Fed's balance sheet has expanded to $6,743bn (+0.6% over thirteen weeks, +1.3% year over year). The recent impulse comes mainly from the Treasury account (TGA), which has fallen $124bn over four weeks to $756bn, injecting liquidity into the system, while the Reverse Repo is practically depleted at $0.1bn, with no further cushion to provide. M2 is growing 5.6% year over year. Outside the U.S., the picture is the opposite: the ECB's balance sheet is down 2.7% year over year and the Bank of Japan's 10.9%. Rising domestic liquidity tends to be a tailwind for risk assets.

Defensive sectors are clearly lagging the market: −14.4 pp over three months and −4.7 pp over the past month (data through May 29), reflecting full risk appetite. The most recent daily Dow/Nasdaq needle points the same way, with +1.4 pp over three months and +3.6 pp over the past month.

The overall data describe an economy in expansion: firm employment, growing credit, solid activity, loose financial conditions, rising liquidity and full risk appetite, with none of the classic recession indicators triggered. The only relevant crack is inflation, which is accelerating again in the U.S. —with PCE at 4.1%— and, to a lesser extent, in the euro area, a factor that constrains central banks' room for maneuver. Depressed consumer confidence contrasts with real spending that keeps growing. In sum, expansion with price pressure as the main point to watch.