Moving Together—for Now

Central banks are likely to tighten in sync through the end of 2026, but US inflation risks could drive a divergence in 2027.

• Since the Iran War began, market expectations shifted from roughly 60 basis points of US rate cuts to 45 basis points of hikes, and from roughly 20 basis points of European cuts to 65 basis points of hikes.
• Markets expect the Federal Reserve, ECB, and BoJ each to raise rates by 25 basis points at their December 2026 meetings; BoJ hike expectations rose from about 42 to 68 basis points after the conflict began.
• European and Japanese inflation is mainly energy-driven, with limited evidence of accelerating wages, services inflation, or second-round effects, although fertilizer shortages could lift food prices.
• US price pressures have broadened through AI-related capital expenditure, which has raised prices for semiconductors, construction, and electricity, while shelter and other services inflation remain elevated.
• The ECB and BoJ have provided clearer forward guidance, whereas the Fed may become less transparent as its policy meetings are reduced from eight per year to six by 2028 and meetings without rate decisions will lack policy statements.

Takeaway: Investors should prepare for tighter and less transparent US monetary policy alongside easier European and Japanese policy after the Iran War ends, a combination that could favor non-US equities over US equities in 2027.