Macro House View Q4 2025

The reflationary wave has brought back QE-era market dynamics—equity markets are rallying on growth optimism while bond markets are demanding higher yields to finance fiscal expansion. Figure 1 shows the Nikkei 225 surged as Japan's government committed to expansionary fiscal policy and deregulation. European and Chinese equities received similar boosts when governments announced fiscal stimulus packages. Figure 2 illustrates that Japanese 10-year government bond yields have exceeded 1.6% and European 10-year bond yields have largely stayed flat despite rate cuts implying higher risk premia.

Figure 1: Global equity benchmarks

Figure 2: 10-year government bond yields, %

This environment creates stagflation-lite conditions—investment and consumer spending drive growth while inflation persists at higher levels. Inflation in the U.S., U.K. and Japan has remained well above rolling 30-year averages and central bank targets (Figure 3). Economies have avoided outright stagflation because wages have grown faster than inflation in key markets. U.S. wage growth runs at 3.7% versus inflation at 3.0%. U.K. wage growth is at 5.0% versus inflation at 3.8%. This positive real wage growth supports consumption and prevents the demand collapse that characterized 1970s stagflation.

The costs of stagflation-lite compound over time. Business planning becomes difficult as inflation volatility increases. Companies face margin pressure from wage growth that outpaces productivity gains. Governments confront fiscal constraints as debt service costs rise with bond yields. As outlined in previous House Views, the reflationary regime amplifies existing inflationary pressures from structural factors such as deglobalization, aging societies and public debt burdens.

Figure 3: Consumer Price Index, data as of October 28, 2025, % change Y-o-Y

Revisions are marginal on the base case. The U.K. is expected to have slightly higher inflation and lower growth over the next five years. Output growth and the labor market have both softened while inflation in housing and services has persisted. These are likely long-term trends while the U.K. government faces budget limitations. By contrast, GDP growth and inflation are both revised up for Japan because of planned fiscal stimulus.

Figure 4: CPI inflation 2025-2029, % Y-o-Y

Figure 5: GDP, 2025-2029, % Y-o-Y

With stagflation-lite conditions, central banks have reordered priorities. The Federal Reserve (Fed) resumed cutting in September and cut again in late October. The Fed has also expressed a willingness to make additional cuts in the near future. Inflation risks are not dismissed but outweighed by concerns over weakening labor markets. We expect one more rate cut in the U.S. in December. Most central banks seem to prefer a neutral monetary stance and will move rather quickly to find it.

Figure 6 illustrates central bank estimates of neutral rates and their remaining room to cut. The Fed and Bank of England signal a full percent in further rate cuts. The European Central Bank has largely completed its cutting cycle at 2%. The Bank of Japan (BoJ) is projected to normalize toward 1.5%. Figure 7 shows our policy rate forecasts through 2028, with most central banks reaching neutral by 2026-2027.

Figure 6a: Central bank estimates of nominal neutral rate

Figure 6b: Difference from neutral and room to cut

Figure 7: Central bank policy rates, end of month, %

The largest revision to our bond yields forecast is an increase of 35 basis points (bps) of the U.K. Gilt to an average of 4.4% from 2025-2029, aligning with the consensus. Persistent inflation, elevated fiscal risk premia and a historical correlation with U.S. Treasuries in the 4% range have driven this change. The Japanese 10-year bond yield is revised up 25 bps to 2.25% for the long term as the new government pursues reflation and the BoJ continues hiking rates. U.S. Treasuries show near-term relief around 4% as the Fed cuts rates to 3%. We still expect 10-year Treasury yield to stabilize in the low-to-mid 4% range based on elevated inflation and term premia.

Figure 8: 10-year government bond yields, %

Given uncertainty around AI productivity impacts, fiscal policy effectiveness, and inflation dynamics, we focus our forecast on the most probable path while acknowledging meaningful risks on both sides. On the downside, persistently high inflation combined with weaker growth could create more challenging stagflationary conditions. On the upside, AI productivity gains could materialize faster than expected, or fiscal stimulus could prove effective, driving stronger growth without inflation acceleration.

To provide parameters for scenario analysis and stress testing, we constructed reference cases using historical shock methodologies. The downside case references the 1978-1984 period of high inflation with weak growth. Bond yields surge and central banks face impossible tradeoffs. This represents a meaningful downside scenario for real estate as cap rates expand while income growth likely lags inflation.

An upside case assumes investment growth matches the internet era boom and AI delivers rapid productivity gains. GDP growth rises meaningfully above the base case. Strong corporate earnings drive job creation and real estate demand. This scenario could prove beneficial for building and holding real estate long term.

The global economy faces crosscurrents from fiscal expansion, elevated inflation and uncertain AI productivity impacts. Our base case sees these balancing out—growth remains positive if modest, inflation stays elevated but doesn't accelerate and central banks reach neutral policy stances.

The risks tilt somewhat to the downside given inflation persistence and fiscal constraints across several major economies. However, upside potential exists if productivity gains materialize more rapidly than anticipated. For real assets investors, this environment calls for selectivity, operational excellence and portfolios resilient across a range of outcomes.

Download the Macro House View Q4 2025.