10.21.2026
PACE KEEPING
We raised our US and euro-area inflation forecasts in response to the persistent energy shock. A potential ECB dovish bias will hinge on core inflation converging towards target in H2 2027.
US real yields have recently risen to levels last seen in 2008 . Some have argued that one of the factors explaining the speed and magnitude of this increase is the surge in AI - related capital expenditure. On the one hand, stronger In the US, incoming data continue to point to solid and sustainable growth rather than an economy that is gaining excessive momentum. We remain comfortable with our view that the US economy will continue to hover around its potential growth rate throughout the remainder of 2026 and 2027.
Given the limited pass-through of higher energy prices to US core inflation, reflecting the relatively low exposure of core CPI/PCE components to energy costs, we continue to believe that the underlying disinflationary trend remains firmly in place.
In the EA, incoming hard data for Q3 have been weaker than expected, in contrast to the more optimistic survey-based indicators. In light of our latest Q3 2026 nowcast of 0.2% q/q, which points to a slower pace of economic activity than the 0.6% q/q recorded in Q2 and is consistent with the recent stream of weaker economic releases, we have modestly revised downwards our annual real GDP growth forecast for 2027 to 1.2%, a downward revision of 0.1 percentage points (pp) from our previous baseline.
In line with the findings presented in our recent note (“MACRO FOCUS - Lessons from the past, views from the future” - October 2026) in which we analyse the pass-through of the recent energy shock to core HICP inflation over the remainder of the forecast horizon, we have revised our EA core HICP forecast upwards: we now expect core HICP inflation to remain stable at 2.5% y/y in Q4 2026, compared with 2.3% in our previous baseline. In annual average terms, we now forecast core HICP inflation at 2.3% in 2027, up from 2.1% in our previous baseline.
The overall outlook for the Chinese economy remains unchanged: domestic demand remains weak, while AI is becoming an increasingly important driver of growth in China, primarily through exports rather than investment. We maintain our annual real GDP growth forecast for 2026 at 4.6% y/y. In light of persistent weakness in domestic demand indicators, we have marginally revised down our annual GDP growth forecast for 2027 by 0.2 percentage points (pp) to 4.6%. Regarding inflation, our annual forecast for headline CPI remains unchanged at 1.0% in 2026. Upside risks to inflation stem from developments in Middle Eastern energy markets.
We expect the Fed to keep interest rates unchanged in October, as macroeconomic developments do not warrant a further rate hike, while the proximity of the midterm elections presents an additional challenge. Beyond October, we continue to expect one or two further rate hikes by March 2027, but we do not expect the Fed to deliver the full extent of the tightening currently priced in by markets (three to four additional rate hikes by October 2027).
We expect the ECB to leave interest rates unchanged in October. A rate hike in December remains a possibility, particularly if energy prices do not decline significantly from current levels. Beyond December, however, we expect the ECB to remain on hold in H1 2027 and shift towards an easing bias in H2 2027, with the number of rate cuts ultimately depending on the pace at which core inflation converges towards the ECB's target (compared with our previous forecast of two rate cuts).
We maintain our forecast of no policy rate or reserve requirement ratio (RRR) cuts in 2026 by the PboC, with near-term policy support more likely to come from accelerated fiscal policy implementation.
Fabio Fois
Head of Investment Research & Advisory
Matteo Gallone
Macroeconomist
Chiara Cremonesi
Senior Rates Strategist
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