Macro & Markets Forecast Edition - Central banks stay on tightening path

The strength of economic activity and persistently above-target inflation justify further US and euro-area monetary tightening despite the recent rise in long-term yields.

• US consumer prices rose 0.6% in September, lifting annual CPI inflation to 3.7% from 3.4%, while core CPI increased 0.3% for the second consecutive month and reached 2.6% year-on-year.
• Nordea expects one more Federal Reserve hike in 2025 and another in 2026, arguing that nominal GDP growth of about 7% in the first half of the year makes 10-year Treasury yields above 5% less restrictive than they might otherwise appear.
• The 10-year Treasury yield rose by roughly 50 basis points in September, and both 10-year and 30-year yields reached their highest levels since 2002, partly because AI investment, public spending and defense are increasing demand for capital.
• Euro-area inflation rose to 3.8% in September and core inflation to 2.5%; Nordea therefore expects two additional 25-basis-point ECB hikes, in December and March 2027, taking the deposit rate to 3%.
• The main downside risk to the ECB and euro-yield outlook is French fiscal stress: the French-German 10-year spread has reached levels not seen since the sovereign-debt crisis, while global public debt is projected by the IMF to rise from just under 94% of GDP last year to 100% by 2029.

Takeaway: Nordea retains a tightening baseline and sees modest medium-term upside for longer EUR yields, but investors should expect substantial two-way volatility because contained core inflation could delay ECB hikes while worsening French fiscal stress or weaker growth could push bond yields lower.