US Stagflation: First Signs Are Here

USD | Fed - Macro Flash Note

The Narrative & Current Regime:
• Narrative anchored on Fed pivot driven by weakening labour market.
• Market thinks last week's spike in jobless claims more important forward-looking signal, looking past hotter-than-expected CPI print.
• Debate no longer if Fed will cut, but by how much/how long. Primary catalyst is FOMC meeting on Wednesday.
• US economy in "stagflation-lite," late-cycle slowdown.
• Growth decelerating (evidenced by consumer sentiment and jobless claims), core inflation remains sticky.
• Conflicting data forcing Fed to prioritise employment mandate over inflation target, fundamentally bearish setup.

Forecast Logic & Key Drivers:
• What is driving growth?
○ Deceleration; key driver is consumer, who are showing clear signs of economic stress.
○ Last week's UoM survey showed collapse in future expectations and spike in unemployment fears.
○ Directly impacts consumption (C) as the largest component of GDP.
• What is driving rates?
○ Monetary policy expectations; short-end yields being driven lower by market's conviction that Fed will begin sustained easing cycle w/ 25bps cut.
○ Focus is now squarely on updated "dot plot," which will signal expected depth and duration of cutting cycle.
• What is driving inflation?
○ Sticky Core Services; inflation remains primary point of tension.
○ Last week’s CPI print showed core inflation remains stubbornly above target (+0.3% m/m), driven by shelter& transportation services.
○ Market's interpretation is that Fed will tolerate this "turbulence" to avoid causing sharp downturn, given weakening labour market.

Key Risk / Counterpoint to View:
• Base Case: Path of least resistance for USD is lower. Expect the Fed to deliver dovish 25bps cut on Wednesday. Key will be dot plot showing significant downward revision to median rate forecast for 25/26 + press conference from Powell that emphasises downside risks to the labour market.
• Key Risk / Counterpoint: The primary risk is "hawkish cut." The Fed cuts by 25bps, but the dot plot is less dovish than the market expects, and Powell uses press conference to heavily emphasise persistence of inflation. This would challenge narrative of deep, sustained easing cycle and could trigger sharp, painful relief rally in USD.

Happy hunting!

Yet the worst to come, Gold will be 4500$ next December 2025!

Remember that Trumps still wants to put more tariffs in place, and the China issue is not closed.
And it all came at the worst possible time, after all that money printing and debt accumulation. It will take decades to solve the problems Trump is creating in the US.

It doesn't help that the united states government is bankrupt, morally as well as financially.