Thursday, June 18, 2026

Macro Musings · Daily Briefing · Thursday, June 18, 2026

The economy won't read the recession script and gas just dropped below four bucks so now what

BMW forecast operating profit for car business down 60% for this year. Analysts and policymakers are debating China's large and growing trade surplus, significant currency undervaluation, and whether a Plaza Accord-style currency realignment is needed, as European automakers and retailers also struggle with Chinese competition.

Personal Stakes · Est. read time 4 min

In 30 seconds: A wave of US economic data releases showed resilient labor markets, strong retail sales, recovering pending home sales, and the Fed holding rates unchanged while downside GDP risks among FOMC members fell sharply. Kuwait is ramping oil production back to 2 million barrels per day faster than expected following the Gulf conflict, contributing to US gasoline prices falling below $4 per gallon for the first time since March. The equal-weighted S&P 500 and industrial stocks are hitting new highs as the Magnificent 7 face pressure, with analysts noting extreme valuation polarization between large-cap and small/mid-cap stocks and watching the Warsh Fed chair appointment for policy implications. Analysts and policymakers are debating China's large and growing trade surplus, significant currency undervaluation, and whether a Plaza Accord-style currency realignment is needed, as European automakers and retailers also struggle with Chinese competition.

The US economy keeps refusing to cooperate with the recession crowd. Initial jobless claims came in at 226,000, down from 230,000 the prior week, a decline of 4,000 on the week. The print was lower than expected. Continuing claims held at 1.810 million. State-level moves were a wash: PA rose 3.7,000, OR added 1.9,000, and MN climbed 1.5,000, while OH fell 2.2,000, IL dropped 2.1,000, and SC shed 2.0. Consumers, meanwhile, are spending. Nominal retail sales continued to accelerate, rising 6.9% year over year in May. The Johnson Redbook retail sales index confirmed the trend, surging 9.4% year over year for the week ended June 13, having been running hot in the 8-9% range for the past six weeks. Housing offered a split screen. Pending home sales jumped 3.8% month over month in May, led by the Northeast at 8.7% and the Midwest at 8.1%, while the South managed only 1.0% and the West barely registered at 0.1%. On the financing side, MBA mortgage applications fell 3.8% for the week ended June 12, with the 30-year mortgage rate sitting at 6.6%. Manufacturing looked constructive. The Philadelphia Fed Manufacturing Index printed 10.3 in June, with new orders at 27.3, shipments at 14.9, and employment at 7.9. Prices paid, at 53.2, suggest input costs remain elevated. The Conference Board Leading Economic Index rose 0.1% in May, in-line. The number of FOMC participants reporting downside risks to GDP growth fell from 9 in the March SEP to fewer in the June SEP.

The number that matters at the pump just flipped. The first digit is now a three. That is the kind of thing voters notice.

The S&P 500 closed at 7,500.58 on 2026-06-18, up 1.08% on the day, but the index-level number obscures a tectonic shift underneath. Equal-weighted S&P 500 made new highs last week while Mag7 remained under some pressure. Industrials are breaking higher, a move consistent with the macro regime having shifted towards falling inflation over the past 1-2 weeks. US equity market valuations remain highly polarized: largest 100 stocks are trading at dot-com-era valuation premiums, while small- and mid-cap stocks trade at historically wide discounts. Semiconductors have been among the most volatile names, moving at least 1% on all 14 trading days so far this month, with half of those days seeing moves of 5% or more. Warsh was announced as the Fed chair pick on January 30. For context on how far the broad market has traveled, the average stock price of S&P 500 companies now sits at $237.24, versus $83.37 ten years ago.

The renminbi is the only major East Asian currency that is stronger than it was 30 years ago and below its long-term trend. That second clause is doing a lot of work. A currency that is simultaneously stronger than it was 30 years ago and yet below its long-term trend is, in the polite language of international economics, undervalued. Correcting China's 20-30% undervaluation should be a policy goal of the EU, the US, and indeed the G7 and the G7 plus — a position that aligns with Chancellor Merz's own stated view. There is no inflection point in Japan's growth around the time of Plaza (1985). Japan did just fine after Plaza; the problem came when the bubble economy popped many years later, and the bubble itself wasn't a direct consequence of Plaza. There was a very symmetric fall in the US deficit and the Japanese surplus from 87 to 90 (exchange rate moves change the nominal trade balance with a lag). The adjustment was not all due to fiscal policy and demand compression. China ended up with a property bubble and what would be a lost decade without big net exports and without any Plaza-type deal. Strip away the noise and Asia's surplus as reported now pops. One reason: China's investment income deficit is fake and lowers the surplus. CNY appreciated. The bubble came anyway. But recent renminbi depreciation helped trigger China's latest export wave. Europe is feeling this concretely. Germany's rolling 12-month bilateral trade deficit with China has ballooned to ~€100bn, and Berlin is increasingly open to an EU version of Section 301 to counter China's unfair trade practices. Shein will close its first physical store in Paris before Christmas after BHV Marais ended the partnership, cutting short a pilot project that faced protests, political criticism, and regulatory pressure.

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