Global Economic Outlook: Inflation Pressures and Market Trends
Julius Baer analysts examine global economic trends, predicting further US rate hikes, stable European rates, and resilient crypto adoption despite regulatory hurdles.
The global economy continues to navigate a series of shifts affecting markets, including inflation, interest rate decisions, massive investments in artificial intelligence, and rapid developments in the cryptocurrency sector. In a recent review by Julius Baer, the firm's analysts break down key trends and potential trajectories for the near term.
Global Inflation and Monetary Policy
In the United States, David Kohl, Chief Economist at Julius Baer, notes that inflation remains elevated and is slow to return to the Federal Reserve's 2% target. He points out that the core PCE index has hovered around 3% over the past three years. Strong domestic demand, heavy investments in AI-related infrastructure, and private consumption continue to fuel price pressures. Consequently, Julius Baer forecasts another interest rate hike in the short term, followed by a shift toward policy easing in mid-2027.
In the eurozone, Kohl estimates that inflation has returned close to the 2% target, leaving the European Central Bank with little reason to tighten further. Eurozone interest rates are expected to remain at 2.5% over the next 12 months. Meanwhile, in Japan, Kohl highlights the ongoing normalization of monetary policy as core inflation holds steady around 2%.
Currency and Fixed Income Markets
In the foreign exchange market, David A. Meier, an economist at Julius Baer, addresses the strengthening of the US dollar by about 0.7%, driven by rate hikes and a hawkish tone from the Federal Reserve. However, he assesses that the currency's further appreciation potential is limited. Meier also notes that the Japanese yen weakened despite the country's rate hike, while the British pound remained stable after the Bank of England kept rates at 3.75%.
"The Federal Reserve's messaging was more hawkish than expected, pushing US two-year Treasury yields sharply higher while long-term yields remained relatively stable," noted fixed income researcher Afonso Borges.
In the bond market, Afonso Borges points to a significant shift in investor expectations. He advises maintaining an overweight exposure to bonds, particularly across the intermediate maturities of the yield curve. European banks are also in focus, with equity strategists Nenad Dinic and Roger Dawgen noting that the current rate environment supports net interest income and profit growth, though financing costs and political risks in France present ongoing challenges.
Cryptocurrencies and Alternative Markets
Turning to crypto, Carsten Menke, Head of Next-Generation Research, addresses regulatory developments in the US. He observes that the failure of the Clarity Act in the Senate was actually accompanied by a roughly 15% surge in Bitcoin and Ethereum prices. This rally was fueled by announcements from the SEC and CFTC regarding tokenization initiatives and the utilization of existing regulatory powers.
Menke emphasizes that regulation is not the sole driver of crypto adoption. He points to the growth of new services such as prediction markets like Polymarket and Kalshi, round-the-clock trading platforms like Hyperliquid, and the rising utility of stablecoins as bridges between decentralized finance and traditional banking.
