10.23.2025
REDUX
In the US, available data suggest growth momentum remains consistent with our baseline. The expansion in activity maintains a positive orientation. We have upgraded our estimate of Q3-25 real GDP growth to 2.7% q/q SAAR, from 1.0% in the previous baseline, amid a pickup in consumer spending and continued growth in business investment. Inflation-wise, our baseline remains unchanged. Incoming data along the goods and services price chain continue to suggest that tariff pass-through has remained limited, because US firms are absorbing most of the tariffs.
In the EA, our baseline remains largely unchanged: the economy grows modestly for now, then gains momentum next year as German fiscal support and external demand strengthen. However, risks remain skewed to the downside, as the road to recovery rests on fragile foundations. Meanwhile, we see continued disinflation in services - which should result in core inflation undershooting by the end of the first half of 2026.
Mainland China’s Golden Week data suggest subdued consumer spending, with retail and restaurant sales up only 3.0%. While domestic demand remains soft, trade momentum appears to have stabilized, and exports are expected to hold steady through 2026 as U.S. tariff effects fade and diversification toward ASEAN countries continues. We continue to anticipate policy measures such as targeted subsidies and fiscal easing will provide only marginal support, sufficient to keep growth momentum steady throughout 2025-26 amid structural challenges including weak consumption, deflationary pressures, and a sluggish property sector. Deflation is expected to persist into mid-2026, though favorable base effects may mechanically lift headline inflation towards 1%, helping to stabilise prices throughout 2026.
Monetary policy wise, despite little to no new information since the September meeting, we expect the Fed to cut rates in October by 25bp and deliver an additional 25bp rate cut in December, taking the Fed funds rate to 3.50-3.75% by end 2025. In 2026, we continue to expect the Fed to deliver three additional rate cuts, taking the Fed fund to 2.75-3% by September 2026, slightly below the neutral level.
We expect the ECB to remain on hold in October. That said, we maintain the view that the EA economy requires further support, particularly in light of strong services disinflation and uncertain macro spillover from the German package, amid still elevated global uncertainty. Against this backdrop, we stick to our view that the ECB will cut rates at least once more, taking the depo rate to 1.75% (vs. no cuts currently expected by markets). However, we acknowledge that the timing of the cut has become more uncertain and could be delayed until March. Beyond March, we expect the ECB to remain on hold until the end of 2026, with risks skewed towards the possibility of one additional rate cut.
In China, following Q2 easing and a Q3 pause, we expect the PBoC to hold steady through early Q4, before cutting the policy rate by year-end to anchor 2026 growth on a solid footing.
FABIO FOIS
Head of Investment Research & Advisory
VALERIO CEOLONI
Senior EM/FX Strategist
CHIARA CREMONESI
Senior Rates Strategist
COSIMO RECCHIA
Senior Equity Strategist
FRANCESCO PONZANO
Junior Equity Strategist
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