THROUGH THE STRAITS
In the US, domestic demand remains robust - supported by resilient consumption and strong non-residential investments. We expect a similar script for Q2 and stick to the view that growth momentum will continue to hover around potential this year. Our inflation baseline view is unchanged. We continue to expect disinflation to continue though we slightly revised up our core profiles to reflect temporary factors and technical forces. In the EA, growth started the year with a weak and uneven print, despite distortions from Ireland. Country details point to fragile domestic demand and questionable strength in Germany, while Spain stands out for resilience. Incoming indicators signal further softening into Q2, prompting downward revisions to our baseline. Our 2026 annual forecast for EA GDP now stands at 0.8% (vs 1.0% prior baseline). Headline inflation remains clouded by energy prices, but core pressures remain contained, with limited risk of persistent second-round effects for the time being. The evolution of consumers’ medium-term inflation expectations remains the key theme on our radar. China’s economy remains bifurcated: consumer spending power remains subdued, while export activity continues to act as the main growth engine. April inflation data point to continued oil-driven reflation, but the pass-through to core and services prices remains limited. Overall growth forecasts are unchanged, while only minor upward revisions to headline inflation reflect oil-driven effects. As widely expected, the Federal Reserve held rates steady in the April meeting. The statement was largely unchanged, including the FOMC’s (easing) guidance about future policy rates. However, the soon-to-be former Chair threw Warsh a curveball. The easing bias in the statement was challenged by three, notoriously hawkish members, and by some considerations expressed by Powell himself that appeared more philosophical than micro-driven. If, on the one hand, the April meeting suggests that the FOMC may have started flirting with the idea of a more neutral monetary policy stance, on the other hand it is well known that “when the cat’s away, the mice will play”. Therefore, we stick to our baseline that the Fed will cut rates this year amid macro and political considerations. That said, our call for three rate cuts this year (with risks tilted toward two) is under revision. With only five FOMC meetings left this year, persisting geopolitical tensions in the Middle East and the hawkish legacy left by Powell may constrain Warsh’s likely desire to ease monetary policy, at least in the first two meetings (June and July) reducing the 2026 easing window. Although EA macro developments have largely unfolded in line with our baseline, we need to enrich our ECB call to incorporate the clear - albeit near-term - hiking signal delivered by President Lagarde during the April press conference. The ECB appears to be moving quickly to shield the EA economy from potential second-round inflation effects, even though - borrowing directly from President Lagarde’s remarks - there is no evidence of such effects, while the real economy has already been hit. Accordingly, although the macro picture embedded in our baseline would not support it, we now expect one rate hike in June (vs. no cuts through Q3 2026). We continue to expect the PBoC to maintain a "moderately loose" monetary policy stance throughout 2026, with continued easing bias to support economic growth despite better-than-expected first-quarter performance.
