Markets remain resilient in the face of higher-for-longer interest rates, tariffs and geopolitical risks, which are testing the durability of the global growth outlook.

Selena Ling
Chief Economist & Head,
OCBC Group Research,
OCBC

July highlighted a shift in market drivers from growth optimism towards policy uncertainty and geopolitics, even as risk assets remained resilient.

Renewed Middle East tensions pushed energy prices higher, and new US tariffs added to inflation concerns. At the same time, the recent correction in AI-related equities highlighted a growing distinction between companies that are successfully monetising AI and those facing questions over capital expenditure and valuations.

Against this challenging backdrop, investors looked beyond momentum and towards diversification, income generation and valuation support. Recent market performance reflects this rotation, with financials, consumer staples and defensive markets such as Singapore and Hong Kong outperforming many technology-heavy indices.

Bond markets painted a more cautious picture. Government bond yields rose across major developed markets as investors reassessed the prospect of interest rates remaining higher for longer. The Federal Reserve left rates unchanged in July, although three policymakers dissented in favour of a 25bp hike, underscoring persistent inflation concerns. Fed Chair Kevin Warsh maintained a data-dependent stance, keeping the possibility of further tightening on the table.

Looking ahead, August will be an important test for risk assets. Investors will closely monitor US employment, inflation and retail sales data, alongside China’s activity and credit indicators. Attention will also be on the Jackson Hole symposium that takes place from 27-29 August 2026, tariff developments, corporate earnings momentum and geopolitical risks.

United States

The US economy continues to show resilience despite signs of moderation. Gross Domestic Product growth slowed to 1.5% on a seasonally adjusted basis in 2Q2026, but underlying domestic demand remained firm, supported by consumer spending and business investment. We maintain our 2026 GDP growth forecast at 2.2% and inflation forecast at 3.5%. The July Federal Open Market Committee delivered a hawkish hold, with rates unchanged at 3.50-3.75% with a 9-3 voting split. 

Our base-case remains for the FOMC to keep the target range for the fed funds rate unchanged at 3.50-3.75% for the rest of the year. There is a risk of a hike. With two inflation releases and one employment report due before the September FOMC meeting, incoming data will be critical. In the near term, we continue to monitor wage growth and inflation expectations in case of a more hawkish reaction from the US central bank. Energy, tariff and supply-chain pressures will feed into the broad inflation scenario being monitored.

Euro-Area

We maintain our 2026 GDP growth forecast at 0.9%, although second-quarter growth suggests the economy entered the second half of the year on a firmer footing than expected. GDP grew 0.4% quarter-on-quarter and 1.0% year-on-year in 2Q2026, after being flat in the first quarter. While growth was broad-based, the recovery remains fragile. Higher energy costs, geopolitical uncertainty and weak investment are likely to weigh on growth in coming months. 

We maintain our 2026 inflation forecast at 3.1%. Inflation rose slightly to 2.9% in July, while core inflation increased to 2.5%, supporting the case for further policy tightening. Following its June rate hike and July pause, we continue to expect the European Central Bank to deliver one final 25 basis point rate hike in September, taking the deposit rate to 2.50%.

Japan

Japan’s economy will remain supported by firm wage gains, accommodative financial conditions and strong global demand for AI related products. Thus, we maintain our 2026 GDP growth forecast at 0.7% and inflation forecast at 2.1%. However, higher import and energy costs may weigh on household spending. The Bank of Japan kept interest rates unchanged at 1.0% in July but signalled a hawkish stance, supporting our expectation of another 0.25% rate hike by the end of the year, particularly if Yen weakness and wage-price pass-through persist.

China

China's economy slowed to 4.3% year on year in 2Q2026, prompting a modest downgrade to our 2026 growth forecast to 4.6%. However, growth remains within the government's target range, as 2Q2026 may mark the cyclical trough. The July Politburo meeting signalled policy continuity rather than large-scale stimulus, with greater emphasis on the "Six Networks" infrastructure strategy covering power grids, computing capacity, communications networks and urban resilience. We expect policy support to focus on accelerating existing programmes, with the October Fifth Plenum likely to be the more significant policy event.

Rates

We continue to expect the Fed to keep rates unchanged at 3.50-3.75% for the remainder of 2026, while monitoring risks from wage growth and inflation expectations. 

The European Central Bank is expected to deliver one final 25bp hike in September, while the Bank of England is likely to remain on hold. The BoJ's increasingly hawkish tone supports expectations of another rate hike later this year. 

In Singapore, Monetary Authority of Singapore tightened monetary policy for a second consecutive meeting by slightly steepening the S$NEER slope, though unchanged inflation forecasts suggest the bar for a further tightening remains relatively high.