Macro Research

Growth downshifted in the second quarter: the BEA's advance estimate put annualised real GDP growth at 1.5%, down from 2.1% in Q1. The labour market is now genuinely soft rather than merely cooling. July payrolls fell 23,000 against a consensus of +83,000, and the same report revised May down to +63,000 and June down to +20,000, leaving the two months a combined 103,000 lower than first reported. Average hourly earnings growth slipped to 3.2% year-over-year, the slowest since May 2021. Unemployment edged down to 4.1%, but largely because people left the workforce. Inflation is easing only slowly. Headline CPI was 3.4% year-over-year in July, with core CPI at 2.5%, and core PCE came in at 3.3% for June, down from 3.4% in May. That is why the Fed held at 3.50%-3.75% on July 29 in a 9-3 vote, with Hammack, Kashkari and Logan dissenting against an inflation rate that has now run above the 2% target for more than five years. The hawkish read that followed that vote has since faded: softer retail sales and the weakening labour data have moved CME FedWatch to roughly 70% odds of another hold on September 16, and Goldman Sachs now calls a September hike very unlikely. The long end has moved the other way regardless. The 10-year Treasury yield is around 4.70% after touching 4.75% this week, a 20-month high, with heavy AI-linked corporate issuance and federal deficit supply both cited as drivers, and two-thirds of 392 respondents to a Bloomberg markets survey this week expect it above 5% before year-end. The 2s10s spread has steepened to roughly 50bp on the same move. That is the practical constraint on AI-linked equities right now: the discount rate on the most capex-heavy, longest-duration names in the chain is rising for bond-supply reasons even as policy-rate risk recedes, and part of that supply is the AI buildout financing itself.