06.24.2026
CRUISE (IN) CONTROL
US growth remains driven by solid domestic demand. Incoming April data point to an economy operating near potential, while overheating risks remain limited. The growth engine model is gradually shifting from consumption-led to capex-led, with AI-related investment continuing to offer further upside, while generating limited inflation repercussions thus far. Indeed, the latest core inflation dynamics remain consistent with an ongoing disinflation trend.
That said, potential overheating risks continue to warrant close monitoring, particularly in relation to income distribution dynamics. Higher-income households continue to experience stronger wage growth, although lower- and middle-income cohorts are beginning to recover. This narrowing gap is partly supported by solid labour demand, but the improvement remains tentative and requires further confirmation.
Euro Area GDP for Q1-26 was revised down to -0.2% q/q, largely driven by distortions from Ireland through net exports. Excluding Ireland, growth was more resilient at 0.3% q/q, but underlying domestic demand remained subdued, both on an EA aggregate basis and on an ex-Ireland basis. Momentum is expected to remain weak in Q2, with continued headwinds in H2 from high energy prices, though a recession is not anticipated, partly due to expansionary German fiscal policy.
Weak economic momentum should limit the pass-through of elevated energy prices to core inflation. The transmission of energy shocks to underlying inflation depends critically on initial macroeconomic conditions, with stronger pass-through typically occurring when inflation is high, demand robust, labour markets tight, and policies more expansionary — all of which are absent in the current cycle.
Our China story is unchanged. The economy continues to perform according to the old model: exports drive growth, while domestic demand remains subdued. Japanification continues: core inflation remains subdued even in a context of rising oil prices.
We have adjusted our Fed fund rate forecast to reflect the increased uncertainty under new Chair Warsh. To account for the Fed’s hawkish signals, we have removed the easing bias from our central scenario and now expect the Fed to remain on hold through year end. At the same time, we continue to believe that a rate cut remains more likely than a rate hike - although both outcomes remain tail risks. In our view, the FOMC’s PCE inflation projection, particularly for core inflation, are overly aggressive. The labor market remains solid but broadly balanced, economic growth is not overheating, and core inflation continues to follow a disinflationary trend, supported by the fading impact of
tariffs and limited pass-though from the prior energy shock. We remain of the view that the ECB will refrain from embarking on an aggressive hiking cycle similar to that of 2022 amid: 1) weakening growth prospects, 2) ongoing core
disinflation, and 3) the absence of second-round effects on wages. While a September move remains a 50:50 proposition at this stage, we maintain our view that the ECB will not be able to deliver the third additional rate increase currently priced in by markets for this year. We also continue to believe that, further down the road and perhaps as early as Q4 this year, the ECB will have to reverse course and deliver at least one rate cut, if
not more, as downside risks to growth intensify the longer the ECB maintains its pre emptive stance.
We anticipate that the PBoC will maintain a "moderately accommodative" monetary policy stance throughout 2026, preserving an easing bias to support growth, even after the upside surprise in Q1 activity.
Fabio Fois
Head of Investment Research & Advisory
Matteo Gallone
Junior Macroeconomist
Investment Research
Chiara Cremonesi
Senior Rates Strategist
Investment Research
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