Macro House View Q3 2026

The broken ceasefire leaves our forecasts unchanged

As forecast in our last House View, the global price of oil peaked at approximately $110-$120 per barrel in April and fell sharply back to approximately $70 per barrel before the Memorandum of Understanding (MOU) was abrogated in July. The global price of oil has since crept up to the mid-$80s. Needless to say, our forecasts are heavily dependent on how the Middle East conflict unfolds.

A question we are often asked is why oil prices didn’t peak higher given the extreme supply disruption through the Strait of Hormuz. The answer lies in looking at the behavior of the largest swing demander and supplier of oil. We now know that China severely curtailed oil imports after the Strait of Hormuz was closed and this helped keep oil prices contained. Lower demand reflected weaker domestic economic activity but also drawdowns of China's extensive oil reserves. One of the puzzles going forward is the extent to which China's reserves have been depleted and whether the Chinese government will continue to play swing driver of oil demand in the months ahead.

Looking at the swing producer of oil, we now know that most of Russia's major refineries have been hit by Ukraine in the past weeks. As a result, the country's capacity to produce oil has been diminished by an unknown amount. We also know that Russia is now introducing export bans as it deals with constraints on gasoline supply for its own domestic consumers.

Given these major uncertainties we have chosen to once again look to the oil futures market for guidance for our forecasts. As a result, our oil price forecasts are largely unchanged from the Q2 edition of the Macro House View. This is because we continue to believe that the Strait of Hormuz will start to become navigable at some point in Q3 with full shipping returning during Q4. We have also left our forecasts for U.S. Henry Hub gas and for Japanese LNG broadly unchanged. However, we have pushed up our forecast for the European gas price based on Europe's reliance on LNG coming through the Strait of Hormuz and the ongoing production capacity issues there.

Energy prices feed into headline and core CPI in different ways in different markets depending on how much governments subsidize the pass-through from wholesale to retail prices. So, it's no surprise that the U.S. is running the highest headline inflation amongst the G7 economies given the underlying robustness of its economy and its lack of subsidies compared with several European and Asian markets. Figure 1 shows that in every major market that we monitor, bar Japan, inflation is above the relevant central bank target.

Figure 1: Global headline CPIs, % Y-o-Y

Market-implied expectations of inflation did fall sharply when the MOU was signed. For example, in the Eurozone the one-year inflation swap that peaked at just over 4% fell to just under 2%. However, since the MOU was abrogated inflation expectations are starting to tick up again, although not to the level seen in the early days of the conflict.

Given that our energy price expectations have not changed markedly since the last forecast round, we have also made minimal changes to our consumer price inflation forecasts. Figure 2 shows that in most major markets we expect the five-year consumer price inflation level to be in the low 2% range. The forecast revisions have been modest and symmetric rather than showing a persistent upward or downward trend across the board. We continue to believe that Australia, the U.S. and the U.K. will see inflation run hotter than some of the Asian markets such as China and Singapore.

Figure 2: Change in CPI, 2026-2030, % Y-o-Y

Higher rates in the U.K., France, Korea, Japan; lower in Australia.

Central banks have responded to price shocks from the Middle East conflict by tightening monetary policy. As we forecast in our Q2 Macro House View, we have seen central bank policy rate increases in Japan, the Eurozone and Australia (Figure 3). We continue to expect a precautionary rate increase of 25 basis points (bps) in the U.K. this year with those increases then reversed in the later years of the forecast (Figure 4). We also expect a precautionary rate rise or two in the Eurozone to be later reversed in 2027. We now also expect the Federal Reserve to raise rates once in 2026, reflecting both a higher rate of headline inflation and the more hawkish commentary from new Fed Chair Kevin Warsh. Similarly, we have revised up our policy rate forecast for Japan with the central bank policy rate now reaching a peak of 2% in 2028. Conversely, in Australia, where the housing market correction is now in full swing, we expect central bank policy rates to be lower than we were recently forecasting: falling back to 3.25% in 2028 and staying there for the rest of the forecast period.

Figure 3: Major market policy rates, %

Figure 4: Central bank policy rates, %

That said, as much as short rates grab all the headlines, it is the long bond yield that really drives our view on cap rates. The latest global bond market moves have broadly left rates where they were in April with 10-year government bond yields in the U.S., Australia and the U.K. in the high fours; yields in the Eurozone and Canada in the high threes, and yields in Germany and Japan hovering at about 3% (Figure 5).

Figure 5: 10-year government bond yields, %

If we look at the forward pricing implied by money markets the curves are either edging higher overall or steepening in a number of major markets, with the exception of Australia. We have brought down our Australian 10-year government bond yield forecast and pushed up the forecast for the U.K. as a result. This means that Australia no longer has the highest bond yield forecast of the markets we cover (Figures 6 and 7). By contrast we have pushed up the bond yield forecast in the U.K., Korea and Japan, with the latter two seeing particularly marked upward moves in line with implied market pricing. Despite expectations of a more hawkish Fed near-term, our U.S. 10-year government bond yield forecast is broadly unchanged with a minor upgrade to 4.4% over the next five years.

Figure 6: 10-year government bond yields, %

Figure 7: 10-year government bond yields, %

To summarize the nominal side of the economy: our energy price forecasts are broadly unchanged, although a little bit more unfavorable for European gas; our inflation forecasts are broadly unchanged; we have moderated our Australian bond yield view and made our U.K., French, Korean and Japanese forecasts more hawkish in line with bond market expectations. With that in mind let's now turn to the real economy.

Higher rates in the U.K., France, Korea, Japan; lower in Australia.

Official GDP data is not yet capturing the impact of the Middle East conflict. However, we continue to see a great deal of resilience coming through from the high frequency data. For example, the S&P Global Purchasing Managers Index (PMI) shows both the manufacturing and the service sectors reading at above their boom-bust level of 50, with a pretty decent recovery in manufacturing over the first two quarters of 2026. However, when we look at the PMIs at country level we can see two different stories (Figure 8). On the one hand we have China, Japan and the U.S. all showing fairly robust positive readings, noting that the U.S. readings are highly dependent on strong performance in the tech sector. At the other end of the spectrum, we have Australia, the Eurozone and U.K., which are either in contraction territory or have just emerged from it. This is to be expected given the structural trends toward lower growth in the Eurozone and U.K. and their greater exposure to the energy price shock disruption, and that the Australian consumer is now responding to earlier interest rate hikes.

Figure 8: S&P Global PMI, Major Markets Index, 50 = no change

Figure 9 shows that our forecasts for real GDP growth have seen very few changes. That said, where we have made modest revisions, they have typically been mildly negative. The relativities between the major markets that we cover are broadly speaking the same. We have faster-growth countries in Asia, the U.S. and Australia and then slower-growth countries in Europe and Japan.

Figure 9: Real GDP growth, 2026-2030, % Y-o-Y

The next factor to look to in the real economy is the labor market. In general, global labor markets were incredibly tight and robust coming out of the pandemic with labor shortages being cited as a constraint on corporate growth in many surveys. However, in many major markets that we cover, the labor market is already starting to weaken from a robust starting point, with the exceptions of Japan and Italy. We also see stark differences in outcomes across generational cohorts. For example, youth unemployment rates (typically defined as those between the ages of 16 and 24), are now higher in many markets than they were in the early days of the pandemic if not (yet) as bad as they were during Global Financial Crisis. Commentators point to the adoption of generative AI in major corporations as a factor here. We believe it is too early to make any definitive statements. Needless to say, it is an area that we are closely monitoring.

Figure 10 shows an incredibly wide range in our employment growth forecasts, with a faster employment growth group including Australia, the U.K. and Spain. Japan and Singapore show multi-year contractions. These forecasts typically reflect local demographic conditions.

Figure 10: Employment growth, 2026-2030, % Y-o-Y

Still “just” a price shock, but the longer it goes on….

In summary, our Q3 macro forecasts continue to show a global economy that has remarkable resilience against exogenous shocks, whether it was the tariffs last year or the Middle East conflict this year. Changes to our real economic growth forecasts are modest and unremarkable and show little sign of a persistent impact from the conflict. Likewise, the price shock from the Strait of Hormuz supply restrictions is transitory: inflation hovers in the low 2% range in most markets and, while some of the more hawkish central banks are likely to raise policy rates in response, those cuts are likely to then be reversed as shipping reopens. However, it behooves us to point out once again that, in a period of elevated geopolitical uncertainty, our base case macro outlook is benign but the chances of it being knocked off course remain high. The longer the restrictions on traffic in the Strait of Hormuz continue, the more likely we are to see real economic consequences. Accordingly, we continue to monitor with great interest the resumption of shipping through the Strait and the normalization of trade flows.