07.22.2026
GETTING TOGETHER
US: Growth resilient, inflation easing; Fed on hold. EA: Slight Q2 growth upgrade; weak inflation pressures; ECB on hold. China: Growth slows on weak demand; PBoC remains tilted toward easing.
In the US, the wider set of economic data remains consistent with an economy expanding near potential, in line with our baseline. While the labour market confirms that overheating risks remain limited, underlying growth remains solid. Our baseline for inflation remains unchanged: a balanced labour market, moderating wage growth, residual seasonality, and the waning impact from tariffs and the FIFA World Cup suggest that core inflation will continue to decelerate in the second half of this year. In the EA, the decline in energy prices, both in the run-up to and following the US-Iran agreement, likely supported a modest improvement in economic momentum at the end of the second quarter. Accordingly, we marginally revise upward by +0.1pp our baseline estimate for Q2. For H2-26, our baseline view remains unchanged. However, ongoing geopolitical tensions - albeit less pronounced than they were between March and April - suggest that downside risks to the growth outlook remain. Inflation-wise, we remain of the view that the current state of the EA economy lacks the momentum to generate significant second-round effects in core inflation.
China's Q2 GDP growth decelerated to 4.3% y/y, continuing to paint a picture of a K-shaped economy: weak domestic demand remains the Achilles' heel of the Chinese economy, while exports and manufacturing - especially in the high-tech sectors - remained resilient. Reflecting the weaker-than-expected Q2 real GDP growth, we revise down our 2026 full-year GDP growth forecast to 4.8% (vs 4.9% in the prior baseline). Despite the downward revision, we still expect China to hit the lower bound of the official 4.5-5% growth target. Inflationary dynamics continue to point to energy pressures that have filtered into headline inflation, but there is still no pass-through to core prices.
We expect the Fed to keep the federal funds rate unchanged at 3.50-3.75% in July, as the lower-than-expected NFP reading in June and most importantly the sharp drop in core CPI inflation registered in June give the Fed comfortable room to adopt a wait-and-see approach in July. Beyond July, we expect the Fed to remain on hold for the remainder of the year, as the disinflationary process progresses and economic growth remains solid without overheating. That said, we continue to believe that a rate cut remains more likely than a rate hike, although both outcomes remain tail risks.
We expect the ECB to remain on hold in July. Beyond July, 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 partially 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.
The PBoC explicitly acknowledged growing "structural divergence" within the economy, a reference absent from both the previous quarterly statement and the Q1 Monetary Policy Report released in May. Moreover, the committee noted that it would "enhance the forward-looking, flexible, and targeted nature of policy”. Our baseline remains unchanged: we continue to expect a 10bp policy rate cut in Q3 and a cumulative 50bp reduction in the reserve requirement ratio over the course of the year.
Fabio Fois
Head of Investment Research & Advisory
Matteo Gallone
Macroeconomist
Investment Research
Chiara Cremonesi
Senior Rates Strategist
Investment Research
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