Bank of America: US, EU & UK Backdrops - FJElite

Global
The ceasefire announced on Tuesday has brought clear relief to markets, but it still looks fragile. Questions remain around Israel-Lebanon tensions and the lack of clarity over passage through Hormuz, even if markets are still willing to lean into the de-escalation story for now. Escalation appears less likely in the near term, but even if the ceasefire holds, the world is unlikely to return to the pre-war backdrop. Energy market disruption is still expected to keep growth weaker and inflation higher, though even in a more negative scenario this still does not look like a repeat of the 1970s, especially with the US economy now less sensitive to oil shocks.

US
In the US, the Fed is still seen as having a dovish bias despite softer growth and higher inflation forecasts. Two rate cuts are still expected this year, based on the view that the Fed will look through supply-driven inflation, wage pressures remain limited, and political pressure will also matter. Risks are tilted toward no cuts, but by September there may be enough evidence of cooling inflation to support a couple of moves.

Euroarea
In the euro area, growth forecasts have been cut sharply for 2026 and 2027, while inflation forecasts have been raised, leaving the ECB expected to hike in June and July 2026 before shifting to quarterly cuts from the second quarter of 2027. The ceasefire lowers the risk of even earlier or more aggressive hikes.

UK
The UK faces a similarly difficult stagflation trade-off. Growth forecasts have been reduced for 2026 and 2027, while inflation forecasts have been pushed higher, with CPI expected to peak at 4.1% in the fourth quarter of 2026. The base case is now for two hikes in June and July 2026, with some risk that the BoE only delivers one, followed by three cuts from the second quarter of 2027.