11.21.2025
DANCING IN THE DARK
One of the longest government shutdowns is having a severe impact on our read-through of the US economy. Available data suggest, however, that domestic demand and labour markets are holding up. Against this backdrop, we stick to the view that 1) the US economy will re-accelerate in Q1 next year and 2) risk are to the upside.
In the EA, we continue to believe Germany will revive EA’s growth momentum going into next year. While evidence is mixed to slightly positive at this stage, downside risks related to quality and implementation of announced spending measures and reforms remain. As incoming data suggest that fiscal and reform optimism remains largely on paper, the jury is still out, in our view. Inflation-wise, we believe the broader core downward trend is likely to remain in place as wage growth continues to ease.
In China, domestic demand remains feeble as we enter Q4. Box-office revenues fell by roughly 30% y/y in October, despite the extended Golden Week holiday. Moreover, export performance in October fell well short of expectations. However, high-frequency shipping data show signs of a rebound in exports in early November - consequently, the October miss in exports could be interpreted as payback after a strong September. Our long-term view remains unchanged. We continue to anticipate policy measures such as targeted subsidies and fiscal easing will provide only marginal support, sufficient to maintain growth momentum 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 favourable base effects may mechanically lift headline inflation towards 1%, helping to stabilise prices throughout 2026.
The Fed cut rates by 25bp in October, taking the policy rate to 3.75-4%. While the FOMC assessment of incoming data, especially inflation, was dovish, the rhetoric about the next move was more hawkish than expected, with Chair Powell arguing that a December cut is far from a foregone conclusion amid limited data visibility. Against this backdrop, the timing of the next rate cut has become more uncertain, and we do not rule that the Fed may choose to wait until January before proceeding. That said, we continue to expect the Fed to deliver four additional 25bp rate cuts by the end of Q3 2026.
We maintain the view that the EA economy requires further support amid strong services disinflation and uncertain macro spillovers from the German package. That said, the ECB continues to sound very constructive on the EA growth outlook, and we do not expect the 2028 forecasts (to be published in December) to show inflation falling meaningfully below target, amid technical, exogenous support related to the unusual incorporation of ETS2 impact into their forecast outlook. Against this backdrop, we stick to our view that the ECB will cut rates at least one more time over the forecast horizon, taking the depo rate to 1.75%, but we have moved the timing of the cut to March (vs. December/March previously). 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.
After easing in Q2 and pausing in Q3, we expect the PBoC to keep policy unchanged through early Q4, before delivering a rate cut by year-end to lay the groundwork for solid growth in 2026.
FABIO FOIS
Head of Investment Research & Advisory
MATTEO GALLONE
Junior Macroeconomist
CHIARA CREMONESI
Senior Rates Strategist
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