Macro Outlook — Inflation, Rates & Equity Valuation
A standing quantitative model of US inflation and its implications for the risk-free rate and fair equity valuation, plus a compact Europe & world readout. Updated with sourced data roughly monthly.
Report date: 2026-07-21 · Analytical framework output — educational tool only, not financial advice. Do your own research.
MACRO MODEL UPDATE — 2026-07-21
Prior run: 2026-07-14. This is the first run carrying a Europe & world (1b) block, so no world deltas are reported — the world values are seeded fresh below.
1. WHAT CHANGED SINCE THE PRIOR RUN
No new US inflation print. June CPI (headline 3.5% YoY / −0.4% MoM, core 2.6% YoY / flat MoM) was already in the prior run's context — it published the morning of 07-14. The CPI fell a seasonally adjusted 0.4% for the month, bringing the annual inflation rate down to 3.5%; core inflation was flat on the month, putting the 12-month rate at 2.6%. The next CPI (July data) lands 2026-08-12; the next PCE (June) is due late July. Core PCE (May) 3.4% YoY is carried forward — FLAGGED STALE. The core PCE price index climbed 3.4% year-over-year in May, the highest level since October 2023 and a pickup from April's 3.3%.
The real move since 07-14 is price action, not data:
- Equities down. S&P 500 fell from ~7,575 to ~7,443 as an AI/semiconductor rotation and renewed Middle-East risk weighed. The S&P 500 fell 0.19% to close at 7,443.28.
- 10Y up. From 4.55% to ~4.57–4.60%. The yield on US 10-Year Note Bond Yield rose to 4.60% on July 20, 2026. Post-CPI it briefly eased toward 4.52%. The US 10-year Treasury yield has eased to about 4.52% after cooler price data. 2Y ~4.19%.
- Oil up. WTI ~$82 (from ~$80); the Iran ceasefire collapsed. Vessel traffic through the Strait of Hormuz declined sharply following Iranian attacks on ships over the weekend, and crude rose to a five-week high of around $83 per barrel.
- Fed pricing. July-29 hold ~87%. According to the CME FedWatch Tool as of 20 Jul 2026, there is an 86.7% probability the Fed will maintain interest rates in the upcoming meeting. Sept hike odds firmed to ~53–63%. Markets are now pricing in around a 53% chance of a Fed rate hike in September, up from 47% a day earlier.
- AI capex intact. No cuts/writedowns; 2026 hyperscaler capex still ~$725B. Google, Amazon, Microsoft, and Meta collectively plan to allocate $725 billion to capital expenditures in 2026 — up 77% — with Amazon at $200B, Alphabet $175–185B, Meta $115–135B, and Microsoft toward $190B. Big-Tech earnings (Alphabet Wed) are the near-term catalyst.
Ledger changes:
- AI-bust overhang 3y −0.15 → −0.20 (+0.05 to the downside weight): the AI/chip selloff and the capex-to-revenue gap narrative intensified into earnings week, raising near-term air-pocket risk. Hyperscaler capex now consumes 94% of operating cash flows after dividends and buybacks, and AI services generate only about $25 billion in direct revenue — roughly 4% of what's being spent.
- Geopolitical mean 3y +0.10 → +0.15 (+0.05): the Iran ceasefire fractured with sustained US strikes and Hormuz disruption, re-loading the near-term energy/inflation tail.
All other weights unchanged (moves < 0.05pp). Verdict: model moved (marginally) — ledger E[core PCE, 3y] nudges 2.65 → 2.70.
2. CONCLUSION FLIPS
- E[stocks,3y] vs E[bonds,3y]: still bonds > stocks at 3y — no flip.
- Fair-vs-actual 10Y gap: was −60bp; now −52bp — still beyond the ±50bp line (no crossing back inside).
- E[π,3y]: 2.65% → 2.70% — still between 2.0% and 3.0%, no crossing.
- Forward P/E gap vs model-average fair P/E: was +26%; now ~+22% (multiple compression from the selloff) — crossed back below the 25% line but remains above 0%.
- Scenario probability crossing 35%: Scenario A remains at 0.50; none crossed 35% in either direction.
One flip: the forward P/E gap dropped back under the 25% marker (now ~+22%). Bond/stock ranking, the ±50bp 10Y line and π-thresholds are unchanged.
3. UPDATED TABLES
Force ledger (pp added to 2.0% core-PCE anchor)
| Force | 3y | 5y | 10y |
|---|---|---|---|
| Fiscal/debt premium | +0.40 | +0.45 | +0.50 |
| Shelter | +0.20 | +0.15 | +0.10 |
| Immigration/labor supply | +0.15 | +0.15 | +0.10 |
| AI buildout | +0.20 | +0.10 | 0.00 |
| Climate/insurance/grid | +0.10 | +0.15 | +0.20 |
| Healthcare | +0.10 | +0.10 | +0.15 |
| Deglobalization/tariffs | +0.10 | +0.10 | +0.10 |
| Demographics | 0.00 | +0.10 | +0.20 |
| Geopolitical mean | +0.15 | +0.05 | +0.05 |
| AI productivity | −0.25 | −0.40 | −0.60 |
| AI-bust overhang | −0.20 | −0.10 | 0.00 |
| China goods deflation | −0.05 | −0.10 | −0.10 |
| Tech baseline deflation | −0.10 | −0.10 | −0.10 |
| Demand/output gap | −0.15 | −0.05 | 0.00 |
| Sum of forces | +0.70 | +0.60 | +0.60 |
| E[core PCE] (2.0 + sum) | 2.70 | 2.60 | 2.60 |
Scenarios
| ID | Name | π | p |
|---|---|---|---|
| A | Grind-down | ~2.6% | 0.50 |
| B | Fiscal dominance/debasement | ~4% | 0.20 |
| C | AI capex bust | ~1.4% (recession) | 0.20 |
| D | AI productivity boom | ~1.8% | 0.10 |
Probability-weighted π(3y) = 0.50·2.6 + 0.20·4.0 + 0.20·1.4 + 0.10·1.8 = 1.30 + 0.80 + 0.28 + 0.18 = 2.56%. Cross-check vs ledger 2.70% → gap 0.14pp, within the ~0.15pp tolerance. σ ≈ 0.85pp; P(π>3%) ≈ 27%, P(π<2%) ≈ 24% (dominated by B and C tails respectively).
Fair 10Y build
| Component | Value |
|---|---|
| r* | 1.45% |
| Expected CPI (model PCE 2.70 + 0.30 wedge) | 3.00% |
| Term premium (raised toward high end on issuance + σ + oil tail) | 0.75% |
| Fair 10Y | ~5.20% |
| Actual 10Y | 4.57% |
| Gap | −63bp (fair above market; beyond −50bp line) |
| Model vs 10y breakeven (2.24%) | model CPI 3.00% sits ~76bp above market breakeven |
Fair forward P/E (three methods)
| Method | Fair fwd P/E |
|---|---|
| (a) Gordon: 0.70 / (5.20% + 3.75% − 5.4% nom growth [2.5 real + ~2.9 CPI]) ≈ 0.70/3.55% | ~19.7 |
| (b) Rule of 20: (20 − 3.5 CPI)=16.5 trailing → ~+6% fwd EPS growth | ~17.5 fwd-equiv |
| (c) Inflation-regime median − turns for vol | ~16.0 |
| Average fair fwd P/E | ~17.7 |
| Actual fwd P/E (S&P ~7,443 / NTM EPS ~$374.5) | ~19.9 |
| Gap (forward) | actual ~+12% above model-average fair |
Note: on the tighter Gordon-anchored read the gap is smaller than the prior +26% because the multiple compressed with the equity selloff. On a trailing GAAP basis the actual multiple sits ~40% above the model's fair trailing multiple (~15–16x). Implied ERP ≈ 3.1–3.6% vs the 3.5–4% norm.
Asset-return matrix (3y horizon)
| Scen | p | 10Y yield | Fair fwd P/E | EPS/yr | 3y stock ret/yr | 3y 10Y-UST ret/yr |
|---|---|---|---|---|---|---|
| A | 0.50 | 4.8% | 18 | +7% | +2% | +4.3% |
| B | 0.20 | 6.5% | 14 | +9% | −4% | −1.5% |
| C | 0.20 | 3.2% | 15 | −8% | −9% | +9% |
| D | 0.10 | 4.0% | 21 | +11% | +14% | +5% |
E[stocks,3y] = 0.50·2 + 0.20·(−4) + 0.20·(−9) + 0.10·14 = 1.0 − 0.8 − 1.8 + 1.4 = −0.2%/yr. E[bonds,3y] = 0.50·4.3 + 0.20·(−1.5) + 0.20·9 + 0.10·5 = 2.15 − 0.30 + 1.80 + 0.50 = +4.15%/yr. → bonds > stocks at 3y (gap widened as equities richened relative to the raised fair-P/E discount rate).
10y horizon (valuation drag amortized over 10 yrs, ~⅓ the annual bite): E[stocks,10y] ≈ +4.6%/yr; E[bonds,10y] ≈ +4.5%/yr → stocks ≈ bonds at 10y (edge narrowed vs prior).
4. EUROPE & WORLD (first-run seed; no deltas)
Euro area. Euro area annual inflation was 2.8% in June 2026, down from 3.2% in May 2026. The core rate, excluding energy and food, fell to 2.4% from 2.6% in May. The ECB hiked in June — the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility were increased to 2.25%, 2.40% and 2.65% respectively, with effect from 17 June 2026. Markets now see a 70% chance of a September rate hike, as the oil surge following renewed US-Iran strikes outweighed the dovish Sintra tone. 10Y Bund ~2.6%; BTP-Bund ~75bp — BTP / Bund spread daily 75.49 bps. EUR/USD ~1.1445 — EUR/USD trades 1.1445, holding the 1.14 handle it has defended for six weeks. For European-listed firms: ECB tightening into an energy shock lifts funding costs while a firm euro trims translated non-EUR revenue.
Switzerland. The SNB policy rate is currently 0%; the Governing Board left it unchanged at both the 19 March and 18 June 2026 assessments. The SNB now forecasts inflation at 0.6% in both 2026 and 2027, and 0.7% in 2028. EUR/CHF ~0.92 — 1 EUR in CHF 0.9227 on 17.07.2026. The SNB reiterated willingness to intervene against excessive franc strength. Strong-franc pressure persists as a safe-haven bid; it squeezes Swiss exporters' margins.
UK. The Consumer Prices Index rose by 2.8% in the 12 months to May 2026, unchanged from April. At its meeting ending 17 June 2026 the MPC voted 7–2 to maintain Bank Rate at 3.75%. Next decision 30 July; CPI expected to rise toward Q4 on energy passthrough. Sticky UK services inflation keeps real rates restrictive for domestic-facing firms.
Japan (global force). The BoJ raised +25bps to 1.0% in June 2026, after a 0.75% plateau held since December 2025. Japanese 10-year yields have been hitting multi-decade highs, reaching levels not seen since 1996. USD/JPY ~156–160. As domestic yields rise, Japanese investors are repatriating capital, selling $29.6 billion of US debt in Q1 2026 alone and removing a historically reliable buyer. Rising JGB yields exert upward pressure on global long rates — a headwind for euro-area duration and rate-sensitive equities.
China (global force). Disinflationary export impulse persists (June US import prices +0.3%, export prices −0.6% flagged mixed goods signal); China goods deflation remains a structural −0.05/−0.10/−0.10pp drag in the ledger. A cheaper China export basket caps European goods pricing power.
5. BOTTOM LINE
Inflation direction is a bumpy grind-down: the model's central core-PCE path is ~2.70% (3y), 2.60% (5y), 2.60% (10y), with the June CPI relief partly hostage to a re-lit oil tail. The model's probability-weighted expected returns keep bonds ahead of stocks at 3y (+4.2% vs −0.2%/yr) and roughly level at 10y (~4.6% vs ~4.5%/yr) after amortizing valuation drag. The near-term AI-bust tail (C) and geopolitical/energy tail grew this week; the standing asymmetry holds — nominal Treasuries hedge scenario C only, while scenario B hurts both stocks and nominal bonds (stock-bond correlation turns positive above ~3% inflation), so TIPS and short duration are the B-hedge.
6. SOURCES
- BLS — CPI June 2026 (bls.gov)
- CNBC — June 2026 CPI report
- Advisor Perspectives / Fox / CNBC — May 2026 PCE
- Trading Economics — US 10Y yield; crude oil; euro-area inflation & rates; UK rate
- MacroMicro — US 10Y (4.59%)
- Benzinga / Yahoo Finance — S&P 500 level
- Forbes / OilPriceAPI — WTI
- Trading Economics / Convex — breakevens (T10YIE 2.24%)
- CME FedWatch via growbeansprout; KuCoin
- Eurostat — euro-area HICP; ECB — June rate decision
- Cbonds / Il Sole 24 Ore — BTP-Bund spread; Investing.com — EUR/USD
- SNB — policy & FX; ING
- Bank of England / ONS — UK CPI & Bank Rate
- CNBC / newtrading.io / Investing.com — BoJ, JGB, USD/JPY
- CreditSights / Yahoo / Goldman via Yahoo — hyperscaler capex
±0.05–0.10pp precision on all weights; this is analytical framework output, not financial advice.
Sources (29)
- BLS — Consumer Price Index June 2026
- CNBC — Consumer price index inflation report June 2026
- Advisor Perspectives — Core PCE 3.4% in May
- Fox Business — May 2026 PCE
- Trading Economics — US 10 Year Treasury Yield
- MacroMicro — US 10-Year Treasury Yield
- Yahoo Finance — US stock market today July 21 2026
- Benzinga — S&P 500 July 21 open
- Trading Economics — Crude Oil
- Forbes Advisor — Crude Oil Price Today
- Trading Economics — US 10-Year Breakeven Inflation Rate
- Convex — 10Y Breakeven Inflation
- growbeansprout — CME FedWatch
- KuCoin — CME FedWatch July/September probabilities
- Eurostat — Inflation in the euro area
- Trading Economics — Euro Area Inflation Rate
- ECB — Monetary policy decisions June 2026
- Trading Economics — Euro Area Interest Rate
- Cbonds — 10Y Italy-Germany yield spread
- Investing.com — US 10 Year Treasury Yield (EUR/USD quote)
- newtrading.io — Swiss Interest Rate 2026
- ING THINK — SNB on hold
- SNB — Current interest and exchange rates
- ONS — Inflation and price indices
- Bank of England — Bank Rate maintained at 3.75% June 2026
- newtrading.io — Japan Interest Rate 2026
- CNBC — Japan's bond market back in play
- Yahoo Finance — Meta, Microsoft, Amazon, Alphabet AI capex
- Investing.com — Big Tech AI spending 2026