Executive summary

• The Fed is caught between an (economic) rock and a (volatile) hard place. The Fed is expected to keep rates unchanged next week in the midst of bond routs. However, strong economic data have fueled inflationary pressures and may still prompt the Fed to deliver a final rate hike in December. The recent rise in bond yields and corresponding decline in the stock market could knock -0.3pp off GDP and -0.2pp off inflation in H1 2024. However, we stick to our forecast of US 10y rates to normalize to 3.9% end-2024 and 3.6% end-2025. In an alternative scenario – higher for much longer and continued QT – we would expect rates to rise to 4.1% end-2024, and 4.0% end-2025, which is still a far cry from the current 5% mark.
• Emerging Asia: higher-for-longer pressures yields and currencies. Financial conditions in Emerging Asia are becoming less immune to developments in the US, complicating the job for central banks in the region. We believe that yields could even go beyond current levels and pressures on FX will grow. India and Indonesia’s fixed income could become attractive in the near future. If the Fed keeps rates higher for longer, the Thai baht and Malaysian ringgit appear to be the most vulnerable.
• Cloudy Eurozone growth outlook boosts disinflationary forces. We expect Eurozone GDP to have flatlined in Q3 and early surveys for Q4 point to growth slipping below zero. Prolonged weak growth and excessive supply means better news on the inflation front: We expect headline inflation to drop to 3.2% y/y in October from 4.3% a month earlier. The overall picture confirms our view that the ECB will take its foot off the brakes in the second half of 2024, with moderate rate cuts.
• Netting interest rates: The French and the Germans won, the Italians and the Spaniards lost. It’s been 14 months and 29 days since the ECB took negative interest rates away. In France, additional interest income exceeded additional payments by EUR12.5bn in the 14 months from July 2022 to August 2023, compared to the previous 14 months; in Germany, the surplus stood at EUR2.4bn. In Italy and Spain, however, rising rates were a drag on households’ finances.