Weekly Investment View: Will US Retail Sales Signal a Further Q2 GDP Slowdown?

This Week

• US Macro – Dominique thinks retail sales data will show flat growth in June, signalling a Q2 GDP slowdown, but is unlikely to shift the Fed’s focus on inflation and employment.
• US Rates – Antonio remains long SOFR Dec25 and short 30Y UST as expectations of persistent inflation and resilient growth limit near-term Fed cuts. However, an economic slowdown could necessitate a September cut.
• China – Liang argues for structural reforms and loose financial conditions despite Q2 GDP growth meeting expectations and exceeding the annual target. He also thinks strong H1 growth reduces near-term stimulus prospects and leaves the PBoC balancing economic support with RMB stability.
• EZ and UK Macro – Henry expects UK inflation data to align with BoE forecasts, with services slightly undershooting. He also thinks labour market data is key for assessing the pace of BoE cuts.
• G10 FX – Ben argues that despite a negative USD-equity correlation suggesting safe haven behaviour, USD weakness reflects shifting investor preferences, keeping pressure on USD unless US asset appeal improves.
• Commodities – Viresh expects Japan’s upper house election to see the ruling coalition retain a slim majority despite sliding support, with rising political uncertainty fuelling bond market volatility but unlikely to shift BoJ policy.

Link to Appendix: Trade Table

Dominique Dwor-Frecaut – US Macro

After CPI, retail sales are this week’s key economic release, which is an advance proxy for the full consumption data released on 31 July. Consensus for the retail sales control group (this excludes more volatile and less frequent purchases) is 0.3% MoM, which would indicate flat real consumption in June, following weak prints in April-May. With consumption accounting for 70% of GDP, this would imply a further slowdown in Q2 GDP excluding net exports and inventories.

Retail sales are unlikely to impact this month’s FOMC. The Fed has already communicated it will stay on hold. Long term, the Fed is more focused on inflation and unemployment than on retail sales and growth. Nevertheless, weak retail sales would suggest weak business pricing power and limited tariffs passthrough going forward.

Chart 1: Slowing Consumption Growth

Antonio Del Favero – US Rates

We remain long SOFR Dec25 (Z5) and short 30Y UST.

To protect profits on short 30Y UST, we increased the stop to entry from 4.7% to 4.84%. We still think our 5.12% target is achievable. We also increased the stop on long Z5 from 95.81 to 95.93 to minimise potential losses.

June CPI was slightly cooler than expected for core and in line for headline. Core PCE will almost certainly be higher than 0.23%. This still means that unless the labour market weakens, the Fed will probably not cut given US tariffs remain an inflation risk in the next few months.

We hope US 30Y UST to trade above our target (5.12%) at 5.20%-ish in the next few weeks. This would allow us to increase risk on Z5 at a better level before the economy slows in the next two months, making a 50bp September cut still possible, while currently unlikely (with upside risks to the economy coming mainly from the equities rally). Despite the equities rally, which means easier financial conditions (FCs) given all else being equal, we still think the economy will slow more than the market is pricing. Long-end yields remain high, and tariffs are high despite the huge uncertainty and the TACO risk. Lastly, STIR would rally more and 30Y UST could further selloff if President Trump fires Chair Powell (tail risk and not our base case).

Chart 2: Upside Risks to Economy Come From Equities Rally

Liang Ding – China

Q2 GDP growth broadly aligned with market expectations. YTD, 5.3% was weaker than Q1’s 5.4% but higher than this year’s 5% target. However, external demand and fiscal spending (two major tailwinds for H1 growth) will become headwinds for growth and further weigh on deflationary pressure in H2. Deepening deflation at -1.3%, the lowest since the 2008 GFC, is the most notable caveat in Q2’s growth data (Chart 3).

The higher-than-targeted GDP growth in Q1 and Q2 presents an opportunity to implement structural reform by abandoning production sides with low efficiency. However, it remains unclear whether a production curb in downstream sectors can resolve deflation. Today’s ‘Central Urban Work Conference’ did not confirm the recent rumour of a repeat of the 2015-style ‘Shantytown’ project. Without an offsetting policy, production curbs may exacerbate deflation by placing additional pressure on midstream and upstream sectors, which could in turn affect downstream sectors again.

Strong H1 GDP growth makes fiscal stimulus less likely short term. Persistent deflationary pressure and economic headwinds in the coming months demand further loose financial conditions. This Monday, the PBoC signalled acceptance of medium and small banks’ bond purchase practices. This removed uncertainties in the market, whether the PBoC feels comfortable with the current level of the CGB yield.

We maintain a bullish view on the 10-year CGB and expect a break of the yield below 1.60% in coming months. The PBoC is caught between the strategic desire for a strong RMB and short-term economic pressure to prevent RMB appreciation against USD. We remain neutral in USDCNY.

Chart 3: YoY GDP (Nominal and Real) vs. GDP Deflator

Henry Occleston – Eurozone & UK Macro

Tuesday sees UK June inflation, where expectations are for a decline in services but a stabilisation in core and headline CPI. If realised, this would largely align with BoE estimates for core and headline, slightly undershooting in services (Chart 4). We will watch the details, which we expect will still show relatively normal inflation breadth, and suppressed wage-intensive services inflation. Food inflation is a risk as it could feed into higher consumer inflation expectations given the high weight it has in regular spending. The BoE has noted this as a risk. We do not see this as overwhelming trend disinflation though.

Wednesday’s labour market data is most important for the BoE’s pace of easing. Watch how May’s PAYE data is revised – at that time we pencilled in May’s decline being revised down from -109k to something like -70k. However, labour market loosening looks set to continue.

Market pricing for BoE cuts has moved much more in line with our expectations recently (market now pricing cuts to 3.6% this year). Our longstanding view is that they will cut to 3.5%. Our long SONIA Z6 trade has benefited well from this, but still has further to go (we target 97.0). Our long UK real rates trade has not performed well but this is a strategic view, and we think it has time to perform.

Chart 4: UK Inflation Largely Aligns With MPR. But

Labour Market Loosening More Important

Ben Ford – G10 FX

USD is negatively correlated to equities. Odd. It implies that if equities fall, USD will rally. This is against commentary spread across the market suggesting USD has lost safe haven status.

However, this is missing the wood for the trees. Local and foreign investors are behaving differently:

• Equities were never going to fall forever. Global data has proven (relatively) resilient and tariff threats have been delayed. Big tech is also helping. Yet the dollar still slipped. This represents a change in US attractiveness, not a change in safe haven status. It has meant a return to US equities from local investors, something foreign investors have limited.
• Stock-bond correlation is returning positive. So, as equities rise, bonds are rallying. Really, the change has been in equities, not bonds. Here, the story remains that foreign investors have better places to invest; outflows have consumed most of 2025.

Overall, foreign investor flows will continue pressuring the dollar lower (Table 1). They still favour EM excluding China, with EM FX Carry trades in vogue alongside Asia equity bets. For the flow story to change, Trump must improve US assets attractiveness. A pause would likely prove insufficient to bring about a USD rally.

Table 1: Strategy Following Foreign Investor Flows Proves Fruitful

Viresh Kanabar – Japan

Japan’s upper house election this weekend is expected to see ruling LDP-Kōmeitō coalition lose a handful of seats. However, we think the LDP coalition will secure the 50 seats required given the regional voting split.

But recent polls still show coalition support sliding as the election quickly becomes a referendum on consumption tax. Prime Minister Ishiba’s strategy thus far is to preach fiscal responsibility and respond with smaller income tax subsidies similar to last year. These cuts have proven unimpactful and ineffective in boosting LDP support given it provides less than two meals out.

Voters are increasingly unhappy given inflation and declining real wage growth, so small blunders become larger scandals for the LDP.

The LDP’s falling popularity has started spooking the bond market as Japanese rates come under further pressure. 10s30s JGBs steepened back above 1.57% this week with the curve broadly selling off across all tenures.

In short, expect more volatility ahead of the election, with 50+ seat LDP coalition required to offer the market short-term relief. We expect little to no impact for the BoJ unless Ishiba resigns on an upset defeat.

Appendix: Trade Tables

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