Macro
Global macro remained characterized by resilient growth but increasingly divergent monetary-policy paths. US activity strengthened materially, with economists raising Q3 GDP expectations to 2.5% annualized from 2.0%, while the NY Fed nowcast increased to 2.27%. August flash PMIs reinforced the message: the US Composite PMI rose to 56.0, its strongest reading since April 2022, driven by services at 56.8, while manufacturing remained expansionary at 53.2. Importantly for the Fed, prices charged fell to their lowest since October 2025, suggesting that stronger activity has not yet translated into renewed broad-based price acceleration. The consumer was less convincing: July retail sales fell 0.6% MoM, sentiment weakened sharply to 51, and major retailers described customers as increasingly value-conscious. The picture remains one of slowing household momentum rather than outright contraction, with AI-related investment increasingly carrying part of the US growth impulse.
The stronger activity backdrop did little to resolve the Fed’s internal policy split. Hammack argued that “some number” of additional hikes may still be required to return inflation to target, while other officials have emphasized the need for more evidence that recent inflation moderation is durable. The broader global rates picture is increasingly divergent: by Aug. 17, roughly two-thirds of 32 major swap markets tracked by Bloomberg were pricing further tightening, with Japan, Canada, the Eurozone and UK expected to tighten faster than the US. For the Fed, the key tension remains unusually strong real activity against inflation that is still projected around 3.3% for 2026, with tariff and energy-price effects continuing to complicate the path back toward 2%.
Japan was the clearest hawkish policy story. July CPI excluding fresh food accelerated to 1.8% YoY, the second consecutive increase, reinforcing expectations that the BOJ could hike as soon as September. Reports that the government would support a September or October move are particularly important: concern about yen weakness and imported inflation appears increasingly aligned across the BOJ and government following recent FX intervention. The constraint is growth. Q2 GDP expanded only 0.3% QoQ / 1.1% annualized, with capital expenditure weakening and consumption flat as higher prices squeezed households. The balance is therefore shifting toward additional normalization, but the BOJ must tighten into a relatively soft domestic-demand environment. September is increasingly a live meeting, with the yen and Japanese duration particularly sensitive to further confirmation.
The Eurozone continued to recover, led increasingly by manufacturing rather than services. Q2 GDP expanded 0.4% QoQ / 1.0% YoY, while the August Composite PMI reached 52.1, marking a seventh consecutive month of expansion. Manufacturing improved to 52.8, its strongest level since May 2022, while services remained softer at 51.7. Germany showed the clearest industrial improvement, with manufacturing PMI jumping to 54.1, whereas France remained the weak link: its Composite PMI declined to 48.8, extending contraction to an eighth month. The result is increasing intra-European dispersion rather than a synchronized recovery.
Inflation dynamics nevertheless became somewhat more favorable for the ECB. Euro-area negotiated wage growth slowed to 2.44% YoY in Q2 from 2.56%, labor-cost growth eased to 3.1%, and consumer inflation expectations declined to 2.9% at one year and 2.7% at three years. These developments reduce the risk of a persistent wage-price spiral, but energy remains the major uncertainty and underlying inflation is still expected to remain materially above target through year-end. Kazaks’ comment that there are “pros and cons” to further hikes captures the September setup: the ECB has room to wait, but a renewed energy shock or stronger activity could still justify additional tightening.
The key macro message from Week 34 is therefore growth resilience without policy convergence. US growth is proving stronger than expected despite a more cautious consumer; European manufacturing is finally improving but remains geographically uneven; and Japan is moving closer to another rate hike despite soft domestic demand. At the same time, cooling wage and output-price indicators suggest the global inflation impulse is no longer uniformly worsening. This creates a more differentiated market regime: BOJ tightening risk is rising fastest, the ECB remains genuinely data-dependent, while the Fed can afford to move more slowly unless stronger US growth begins to interrupt the recent disinflation trend.