Resilient growth
Resilient growth
We now expect the Fed to keep interest rates unchanged at 3.50-3.75% for the rest of the year. Downside risks to the job market have eased or been pushed back, going by the latest strong US job data.
Selena Ling
Chief Economist & Head,
OCBC Group Research,
OCBC
Risk assets ended May on a strong note, buoyed by rising optimism that US-Iran talks are making progress. Markets are likely to remain on a constructive footing in June, provided AI-driven optimism continues to support sentiment. The S&P 500 closed at fresh record highs at end-May, underpinned by resilient corporate earnings, sustained momentum in AI-related investments and easing concerns over energy supply disruptions.
Meanwhile, the US 10-year Treasury yield retraced from its May peak of 4.68% to around 4.44% at the end of May, reflecting expectations that tensions in the Iran conflict may be nearing resolution and that the Strait of Hormuz could reopen – even though developments remain fluid. Elsewhere, Kevin Warsh was sworn in as the new Fed Chair on May 22.
Looking ahead, investors remain alert to the possibility of more hawkish signals from major central banks. A 25bp rate hike is already the base case for the upcoming ECB meeting, but attention will be on whether policymakers signal additional tightening ahead.
In Asia, manufacturing PMIs remained resilient in May, pointing to sustained AI-led momentum into 2Q2026 following stronger-than-expected growth in 1Q2026. This should help alleviate some earlier concerns about downside risks linked to the US–Iran tensions.
United States
The US economy remained resilient in May, although signs of moderation became more visible beneath the surface. Real GDP growth in 1Q2026 was revised down to 1.6% QoQ on a Seasonally Adjusted Annual Rate (SAAR) from the initial estimate of 2.0%, mainly reflecting softer consumer spending and weaker inventory accumulation. Nevertheless, growth is expected to rebound in 2Q2026, supported by trade normalisation, inventory rebuilding, and continued AI-related investment. As such, US growth is likely to remain above 2.5% QoQ SAAR in 1H2026.
We no longer expect a final 25bp Fed funds rate cut and now expect the FOMC to keep the target range for the Fed funds rate unchanged at 3.50–3.75% through this year. Downside risks to the labour market have been reduced, or delayed, as reflected by the latest strong US jobs data.
On inflation, our base-case is for inflation to peak in 2Q2026 and moderate in 2H2026, but this is partly premised on some de-escalation in geopolitics. Should energy prices stay elevated for longer, the growth impact might kick in which would complicate the policy rate decision. Uncertainty on the economic outlook, in particular inflation, remains high.
At this juncture, the appropriate policy option is probably a status quo. That said, some Fed officials have become more hawkish of late, showing less patience to see through supply-side inflation pressure. Next to watch is June FOMC and the accompanied SEP (summary of economic projections) including the dot-plot where the focus is the median dots with the one for the longer term showing where the neutral rate is seen at.
On US Treasury (UST) yields, we have revised our forecasts to reflect our updated call on the Fed’s rate trajectory (see US interest rate forecasts table).
Euro-Area
We maintain our 2026 GDP growth forecast at 0.9% YoY and maintain our headline CPI at 2.8% YoY. This reflects the impact of the ongoing conflict in the Middle East on macroeconomic variables, namely through higher oil and gas prices and higher fertiliser costs which are having a knock-on impact on food prices. ECB President Christine Lagarde has consistently reiterated the central bank’s readiness to tighten monetary policy even if the inflation surge proves transitory. That said, we do not expect an aggressive hiking cycle to kick in at this juncture and have pencilled in a 25bp insurance hike at the June meeting.
Japan
Preliminary GDP growth estimates show that the economy grew by 0.5% QoQ sa (seasonally adjusted) from 0.2% in 4Q2025, driven by stronger-than-expected exports and private consumption. While the economy has remained relatively resilient thus far, the latest figures largely predate the escalation of the Iran conflict and do not fully capture its economic impact, which is expected to dampen growth. Indeed, incoming data suggests potential downward revisions to 1Q2026 GDP growth. Our 2026 GDP forecast remains at 0.8% with headline CPI at 2.5%. We also continue to expect the BOJ to deliver A 25bp rate hike at its upcoming June meeting.
China
China's April data highlighted a widening divergence between old-economy sectors, which remain under pressure from property and weak domestic demand, and new-economy sectors, which continue to benefit from structural upgrading and external demand. As such, we keep our view that 5% growth rate in the first quarter is likely to be the peak quarterly growth for the year. Nevertheless, we still expect China’s economy to grow by about 4.7% this year.
Source: OCBC Group Research, 2 June 2026
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