Why BNP Paribas Sees US Demand Cooling Toward Sustainability

For market participants, the BNP Paribas report highlights a challenging environment. If demand remains too strong, the risk of 'higher-for-longer' interest rates increases, potentially pressuring equity valuations and compressing margins. Conversely, if the moderation accelerates too rapidly, the narrative shifts toward recession risk.

Traders should pay close attention to the divergence between service-sector demand and goods consumption. The BNP Paribas data suggests that while the consumer is still spending, they are becoming increasingly discerning. This shift has profound implications for sector rotation strategies. Investors are shifting focus from high-growth, rate-sensitive assets toward companies with strong balance sheets and the pricing power to maintain margins even as aggregate demand cools.

Historical Context and the Road Ahead

Historically, the US economy has demonstrated a unique capacity to absorb shocks, but the current cycle is unique due to the speed and magnitude of the Fed’s hiking cycle. Previous cycles, such as the mid-1990s 'soft landing,' provide a template for what markets are currently pricing in: a slow, controlled descent rather than a sharp cliff.

Looking forward, the critical data points to watch are the labor market participation rates and real wage growth. BNP Paribas maintains that the health of the US economy is inextricably linked to the labor market’s ability to remain tight even as demand moderates. If the labor market holds, the 'dominant' demand thesis remains intact, providing a floor for the economy. However, should the moderation in demand translate into a rise in unemployment, the outlook will require a significant downward revision.

As we move into the next quarter, market participants should anticipate continued volatility. The 'moderating' aspect of the BNP Paribas thesis suggests that traders should prepare for a period where economic surprises are more likely to be on the downside, as the era of easy, unbridled growth fades into the rearview mirror. Monitoring the interplay between consumer sentiment, retail sales, and Fed rhetoric remains the most effective strategy for navigating this period of economic transition.