US: Weaker growth outlook as political concerns intensify. The US economy has witnessed a significant downgrade in its growth outlook. Over the past fortnight, the Atlanta Fed GDPNow model halved its GDP growth forecast for 2Q24 to an annualised 1.5% q/q saar from 3.1%. Growth had already decelerated to 1.4% in 1Q24 from 3.4% in 4Q23. In May, retail sales excluding autos contracted at the same 0.1% pace as April and June, and is likely to disappoint too. The ISM Service PMI fell below 50 for the second time in three months to 48.8 in June, the worst reading since May 2020. New orders plunged to 47.3, its worst reading since Dec 2022. Against this background, the Fed is not contemplating a rate hike, but when to start cutting rates, a message Fed Chair Jerome Powell will likely convey to the US Senate Banking Committee next week on 9 July.

US political leadership worries have taken centre stage, eclipsing the French and UK elections. President Joe Biden faces intense pressure to withdraw from his re-election bid at the US Presidential Elections. The US is looking at four more months of political uncertainties vs the end of the French and British elections this week, further underlining the urgency of the situation.

The Fed’s recent narrative suggested that the labour market has become as important as inflation data in providing the Fed the confidence to lower interest rates. Powell echoed San Francisco Fed President Mary Daly’s warning about the US labour market reaching an inflection point, and flagged May’s unemployment rate increase to 4%, citing it had hit the Fed’s projected level for 4Q24. Fed Chair Jerome Powell said the Fed was ready to respond if US jobs weakened unexpectedly. Hence, a continued rise in unemployment above 4% in June is significant, especially if average weekly earnings growth declines below 4% y/y for the first time in three years. Consensus expects nonfarm payrolls released later today to drop below 200k to 190k.

Looking for more evidence that the labour market is cooling, Powell will likely pay attention to the average hourly earnings, which consensus sees declining to 3.9% y/y in June for the first time since Jun 2021.

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