Macroeconomics: The Day Ahead for 15 July 2026

In contrast to Q1, when GDP proved to be stronger than the accompanying monthly indicators, Q2 GDP missed forecasts in y/y terms at 4.3%, though matched the predicted slowdown to 0.9% q/q from Q1’s 1.3%, with a 1.6% y/y rise in the GDP Deflator a key contributor, and obviously paced by the jump in energy and other commodity prices; it was the first GDP deflator rise since Q1 2023.   Still that return to inflation was all due to external factors, rather than pressure from domestic demand, and will likely dissipate in H2 2026. Monthly data were mixed, with Retail Sales defying expectations of -0.1% y/y with a still tepid 1.0% y/y rise, while Industrial Production easily beat a forecast of 4.6% at 5.3% y/y, but Fixed Asset Investment remained dire at -5.7% y/y, even worse than the expected -5.0%, with Property Investment again a major contributor at -18.0% y/y vs. a forecast of -16.8% y/y. As can be seen on the attached chart, the property sector has been major millstone around the economy since Q2 2022, all the piecemeal measures that have been implemented have had no lasting impact, and as much as demographic trends imply the sector as being ‘ex-growth’, clearing the backlog of bad debts would at least reduce that impact.

June’s credit aggregates also proved disappointing, with New Yuan Loan growth at 5.2% y/y vs. expectations of 5.4%.

China’s economy remains very imbalanced; the likely limited and targeted stimulus measures that are set to be discussed at the Politburo meeting appear unlikely to redress that imbalance, even if strength in external demand thanks to AI related investment and auto exports should continue to provide a large offset to domestic weakness in H2 2026.

Yesterday’s much lower than expected CPI was paced at headline level by gasoline and utility prices, but it was the flat m/m 2.6% y/y reading for core that reduced the market probability of a July rate hike to an outside chance. Notably, weakness in Shelter due to an unexpected drop in hotel prices, a drop of -0.8% m/m in Education, only a modest 0.2% m/m rise in airline fares, a slight fall in Medical Care and a fall in Apparel all contributed to softer core CPI.

Warsh’s testimony reaffirming ‘no tolerance for elevated inflation’ was certainly of some comfort, but it also implies (as per Waller’s Monday comments) that the June fall will need to extend into Q3 and beyond, given that y/y rates of 3.5% y/y headline and 2.6% core remain ‘elevated’. For some commentators with a rate cut agenda, the soft readings in goods and services prices will be construed as signalling households are reining in their spending due to inflation pressures, but this may be a little premature at the current juncture.  

Today’s PPI is forecast to slow sharply in m/m terms to unchanged headline in the main due to energy prices (gasoline and jet fuel most notably), and 0.3% core, which would see headline y/y ease to 6.2%, but core climb to 5.2%. Warsh’s testimony yesterday was long on messaging about the Fed’s independence, its inflation fighting credibility, ‘steering clear of fiscal policy’. And in terms of the economy, emphasising the labour market is in ‘pretty good balance’, ‘remarkably resilient’ with ‘solid growth in nominal wages’. Otherwise, he unsurprisingly emphasised that the external task forces on Fed policy parameters are in ‘discovery mode’, and thus able to deflect any questions on the policy outlook. Expect more of the same today.

The Fed’s Beige Book will likely continue to describe growth as ‘slight to moderate’, with some relief from the short-lived MoU between the US and Iran likely to have boosted outlook optimism (and the report unlikely to capture reaction to the renewed set of tensions), as was also evident in yesterday’s NFIB Small Business Optimism jump, paced above all by a surge in the Economic Outlook to 13 from 3.