Further U.S. economic acceleration is unlikely as underlying growth drivers are strained. Economic models suggest consumer consumption is 'overshooting its fundamentals,' indicating it's unsustainable. Concurrently, the incremental growth from AI-related capital expenditure is becoming harder to achieve, suggesting a potential plateau for this key investment area.
Morgan Stanley holds a contrarian view that the European Central Bank will cut rates in June and September. This is based on the expectation that an upcoming inflation print will fall below the ECB's target, fundamentally shifting the policy debate. A below-target reading would reverse the burden of proof, forcing policymakers to justify not easing policy further.
The forecast for one or two Federal Reserve rate cuts in the second half of 2026 is conditional on a key inflation dynamic. The analyst believes firms will finish passing through tariff costs to consumers by the end of the first quarter. Only after this temporary inflationary pressure subsides can the Fed gain the confidence needed to push policy closer to neutral.
While historically ambivalent or even positive about a weaker yen, the Bank of Japan is reaching a threshold where currency depreciation excessively hurts households via imported inflation. This pressure could force the BOJ to hike rates earlier than fundamentally warranted to prevent the yen from 'getting out of hand,' marking a significant shift in its policy reaction.