Ostrum AM Perspectives July 2026

Outlook at 07/10/2026.

The CIO Letter

Oil Easing but Valuations Raise Questions

The memorandum of understanding on Iran has triggered an easing in oil prices and inflation since mid-June. Oil is trading around $70 again, and business confidence is improving. The Hormuz reopening remains partial, meaning low inventory levels will continue to pose upside risks for crude for several more months. Despite cautious rhetoric on inflation, few central banks have tightened policy. The RBA, then the ECB, and possibly the BoJ, have implemented rate hikes. On the activity front, unbalanced growth in the United States is not generating jobs. Low unemployment is misleading given weak participation rates. In the eurozone, the growth trough following the Iranian crisis is gradually fading. In China, domestic demand remains insufficient, but inflation is recovering.

Financial markets remain well-oriented. However, risk assets have experienced increased volatility around questions over technology valuations, particularly semiconductors. Unprecedented amounts from recent IPOs are also weighing on indices. Regarding bond markets, the 10-year U.S. Treasury oscillates around 4.50%. The decline in inflation has triggered a beneficial drop in both short- and long-term inflation expectations. The prospect of a Fed hike is fading. Consolidation toward 4.30% by year-end appears to be taking shape. In the eurozone, the Bund temporarily returned below 3% thanks to oil. The ECB will remain vigilant, which should bring the 10-year back toward 3.10%. Sovereign spreads came under pressure around the semester-end. Upcoming elections in France and Italy are likely to maintain volatility. Credit spreads remain very tight, in both investment grade and high yield. The summer slowdown in primary markets will keep spreads contained. Finally, the yen remains weak but Japanese authorities have alluded to intervention and GPIF repatriation flows.

Economic Views

THREE THEMES FOR THE MARKETS

ECONOMY: UNITED STATES

Growth is mediocre outside AI, which is growing at 25% annually; a slowdown appears inevitable.

• Demand: Consumption has weakened alongside declining real wages and employment stagnation. Housing investment continues to contract due to property shortages and rising prices. The trade balance deteriorated in Q2 despite crude oil exports. Productive investment remains highly dynamic driven by AI (data centers, software, and R&D).
• Labor market: Employment data are poor. Job creation, concentrated in a very limited number of sectors, is slowing, and the unemployment rate would be much higher without a sharp decline in participation. AI is a recurring driver of restructuring.
• Fiscal policy: The refund of illegal tariffs (~0.5pp of GDP) would constitute a stimulus benefiting businesses. The fiscal situation remains precarious and prevents debt extension. Military spending will increase.
• Inflation: Inflation likely peaked in Q2, despite expected base effects (energy at year-end). Housing remains a source of disinflation. Second-round effects appear limited.

ECONOMY: EURO AREA

The energy shock triggered by the closure of the Strait of Hormuz, followed by its partial reopening, is expected to weigh on euro area growth in Q2 and Q3, before economic activity gradually recovers, supported by moderating inflation and increased infrastructure and defence spending in Germany.

• Irish GDP volatility: Euro area growth is distorted by the volatility of Irish GDP, driven by multinationals (initially reported at -2.0% in Q1 before being revised to -12.1% and subsequently to -7.0%). Excluding Ireland, euro area GDP would have grown by 0.3% in Q1 after 0.4% in Q4. The expected rebound in Irish GDP in Q2 should more than offset the ongoing slowdown across the rest of the euro area. A gradual recovery in economic activity is expected to begin from Q4 onwards.
• Domestic demand: After plunging in April and May, business surveys improved as oil prices declined following the signing of the memorandum of understanding between the United States and Iran. New orders, however, continue to contract and households remain reluctant to spend. Household consumption is set to be affected in Q2 and Q3 by the loss of purchasing power, while investment is likely to be weighed down by a more cautious stance from both businesses and households.
• External demand: External trade is expected to make only a limited contribution to growth in a context of slowing global demand. Europe also continues to face increasing competition from China and remains constrained by weak competitiveness.
• Fiscal Policy: Aside from Germany, which is significantly increasing its infrastructure and defence spending, fiscal space remains limited for most countries. France needs to implement fiscal consolidation measures. The objective of bringing the budget deficit down to 5% now appears to be at risk.
• Inflation: Inflation is expected at 2,7 % on average in 2026, driven by the energy shock and its gradual pass-through to other sectors of the economy. It should moderate in 2027, in line with energy prices.

ECONOMY: CHINA

The easing of tensions in the Middle East, lower oil prices, reduced supply-chain distortions, and strong AI-related investment should help sustain the resilience of Chinese exports. The PBOC has formalized the overnight repo rate, which could become its new policy rate. 

• Activity: Economic activity stabilized toward the end of Q2, as reflected in both the official PMI surveys and the June RatingDog PMI, particularly in the manufacturing sector, which continues to benefit from export demand. AI-related activity and demand from new-energy industries boosted Chinese corporate profit growth to 21% year-on-year in May.
• Exports: Export growth surged to 19.4% year-on-year in May, driven by high-tech products, which now account for 30% of total Chinese exports. Electric vehicle exports also jumped 39% year-on-year. The easing of Middle East tensions, lower oil prices, strong global AI investment, and continued diversification of trading partners should support the resilience of Chinese exports going forward.
• Consumption: Retail sales declined by 0.6% year-on-year, marking the first drop since late 2022. However, RatingDog PMI surveys continue to point to resilience in the services sector.
• Inflation: Inflation eased to 1.0% in June (from 1.2%) on the back of lower crude oil prices. Inflationary pressures are also moderating according to manufacturing PMI surveys, consistent with the 0.3% month-on-month decline in the Producer Price Index (PPI).
• Monetary Policy: The PBOC has formally incorporated the overnight repo rate into its operational framework to improve liquidity management and reduce interest-rate volatility. The central bank will also provide yuan liquidity to foreign central banks through reverse repo operations in the domestic market, with the broader objective of accelerating the internationalization of the renminbi.

Monetary Policy : FED

Kevin Warsh leaves his mark from his very first meeting at the helm of the Fed

• At his first meeting as Chair of the Fed, held on June 16–17, Kevin Warsh has already altered the central bank’s communication. Forward guidance on the future path of interest rates has been removed, reducing the Fed’s statement to just nine lines.
• The decision to leave rates unchanged, within the 3.50%–3.75% range, was unanimous. Economic activity is still viewed as solid, while inflation remains elevated. The statement states that the Fed will deliver price stability (one of its core objectives).
• Another change is that Kevin Warsh did not present his own outlook in the SEP (Summary of Economic Projections) and, at the same time, downplayed those provided by FOMC members. Nine members expect at least one rate hike by year-end, eight foresee a status quo, and one is in favor of a rate cut. These divergent views reflect limited conviction within the FOMC.
• Kevin Warsh also announced five task forces aimed at overhauling the Fed, with most conclusions expected by year-end. They cover: communication, balance sheet policy, data usage, productivity and employment, and the inflation analysis framework.
• With Kevin Warsh at its helm, the Fed is operating under the influence of the White House. Although our forecast is for a status quo on the Fed funds rate through the end of the year, the next rate move is more likely to be a cut.

Monetary Policy : ECB

Heading toward a second ECB rate hike in September.

• As it had largely signaled at its April meeting, the ECB raised its rates by 25 bps on June 11, for the first time since September 2023, bringing the deposit rate to 2.25%.
• Persistently high oil prices, driven by the ongoing conflict in the Middle East, along with signs that the energy shock is feeding through to services prices, have led the ECB to significantly revise its inflation outlook upward.
• The prospect of a stronger pass-through of the energy shock to core inflation (expected at 2.5% in 2026 and 2027) reinforces our view that the ECB will deliver another 25 bps rate hike at the September 10 meeting, in order to anchor inflation expectations.
• During the press conference, Christine Lagarde dismissed the notion that this was an insurance or pre-emptive rate hike, stating that the decision was justified under all three scenarios (milder, adverse and severe).
• The framework agreement signed between the United States and Iran does not alter our scenario. The improvement remains fragile, as highlighted by the recent increase in oil prices. Even under the assumption of a full reopening of the Strait of Hormuz, oil prices would remain above pre-conflict levels, raising the risk of second-round inflationary effects that the ECB may need to counteract.

Market views

Asset classes

• U.S. Rates: Kevin Warsh has assumed his duties as head of the Fed and chaired his first FOMC in June with the ambition to reform the institution. Monetary status quo should be maintained until the end of the year. 
• European Rates: The ECB should raise rates once more to weigh on inflation expectations. The 10-year Bund will oscillate around 3.10% before declining toward 3.0% at year-end. 
• Sovereign spreads: Sovereign spreads have almost completely erased the Iranian crisis. Political considerations in France should weigh on the OAT at year-end. Italy's spread should remain around 75 basis points or higher. 
• Eurozone Inflation: Long-term inflation expectations have increased due to the oil shock. The premium is beginning to diminish.

• Euro Credit: IG credit spreads have quickly erased the Iranian crisis and the primary market is well absorbed. However, valuation levels would justify widening by year-end. 
• Euro High Yield: High yield valuations should normalize over the course of the year. The default rate, however, remains contained and below the long-term average. 
• Exchange Rates: The structurally bearish trend for the greenback should resume as the Iranian crisis dissipates. 
• European Equities: Earnings should improve in the second half of the year.
• Emerging Debt: The EMBIG is withstanding the Iranian crisis. Spreads will remain tight around 250 basis points.