Economic and financial risk insights: global bond yield curves steepen

• Growth: global growth to slow as fragility in the US labour market becomes pronounced and the boost from trade front-loading fades.
• Inflation: tariffs are slowly creeping into US consumer prices, while the euro area hovers around the 2% target and China remains in deflationary territory.
• Interest rates: the Fed to cut by 25 bps in September and once more by year-end, while the ECB likely to deliver one final cut to 1.75% by year-end.

Growth: US labour market weakness will persist. US nonfarm payrolls rose by just 22'000 in August, the unemployment rate rose to 4.3% and the vacancies-to-unemployment ratio dropped below 1 for the first time since 2021 (see Figure 1). We expect hiring conditions to remain weak in the coming months as business uncertainty and tariff impacts dampen US growth momentum.

Figure 1: US vacancies to unemployment ratio

In the euro area we expect only a modest and fragile recovery in the second half of 2025, leaving full-year GDP at around 1.2%. Growth was supported by tariff front-loading in Q1 but stalled in Q2, with output flat and household spending rising by just 0.1% quarter-on-quarter. Looking ahead, Germany’s fiscal stimulus should provide a more meaningful boost in 2026.

In China, August marked the fifth consecutive contraction in the manufacturing PMI, suggesting the growth outlook is increasingly reliant on policy support. In the rest of Asia, the waning of trade front-loading is weighing on exports, despite AI-related spending providing some relief.

Inflation: fading disinflation in advanced economies. US goods prices suggest tariff-related pressures are beginning to feed through, which we expect will lead headline CPI inflation to average around 2.8% through 2026 (see Figure 2). In July the Fed’s preferred gauge, core PCE, edged higher to 2.9% yoy while headline CPI was steady at 2.7% yoy (core: 3.1%).

Figure 2: US Core PCE 

In the euro area, headline inflation remained anchored near the ECB’s 2% target, edging up only by 10bps to 2.05%, but softer energy prices keep near-term risks to the downside. Medium-term risks lean upward, given Germany’s large public spending plans. China remains in deflationary territory with an 0.4% yoy decline in CPI in August.

Interest rates: monetary policy diverges as fiscal risks steepen global yield curves. In the US, Fed Chair Powell’s Jackson Hole speech in August reinforced expectations for a cut at the September meeting. Further gradual easing will likely follow into 2026 given a weaker growth outlook and rising labour market risks. In contrast to the start of the US easing trajectory, the ECB is close to completion and we expect it to hold the policy rate at its 11 September meeting, and lower only once more by year-end, to 1.75%. In China, the PBoC has injected liquidity and signalled readiness to ease further, with 10-year yields hovering around 1.8%.

Global bond markets are increasingly pricing in fiscal sustainability concerns at the long end of the yield curve and we see scope for further upside in yields in the coming months.

Figure 3: 30y government yields, z-score normalisation 

Baseline view: we expect the US growth slowdown to linger into 2026, euro area growth to stay sluggish and China to lean on policy support.  

Table 1: Key forecasts and scenarios (in %)