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Both core Consumer Price Index inflation (4.7% YoY) and the Fed’s preferred inflation gauge, core PCE (+4.1% YoY) remain more than double the Fed’s target, precluding any near-term easing of monetary policy. Instead, with public debt above 120% of gross domestic product, the fiscal deficit (8.6% of GDP in the year to June 2023) is likely to place upward pressure on bond yields through the rest of CY23.
U.S. real GDP remained robust in Q2 CY23 (+2.4% QoQ seasonally adjusted annual rate; +2.6% YoY, versus 1.8% YoY in Q1 CY23), as the generous ‘Bidenomics’ subsidies boosted business investment (+7.7% QoQ saar), and the weak USD reduced the drag from net exports.
With M2 money supply down 3.6% YoY in June-23, both inflation and real GDP are likely to moderate in H2 CY23. The resumed strengthening of the USD and the diminution of the fiscal deficit (as spending restraints kick in from October 2023) will likely contribute to slower aggregate demand, and the likely onset of recession in the final quarter of CY23 and Q1 CY24.
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