Macro Outlook Europe — Inflation, Bund Yields & Equity Valuation

A standing quantitative model of euro area inflation and its implications for the euro risk-free rate (10-year Bund) and fair European equity valuation, with a full Switzerland block, the UK, and a world readout (United States, Japan, China, emerging markets). Each update loads the prior model state, refreshes it with sourced data, and reports what changed. Updated with sourced data roughly monthly.

Companion edition: Macro Outlook

Report date: 2026-10-03 · Analytical framework output — educational tool only, not financial advice. Do your own research.

Euro Area Inflation, Rates & Equity Valuation — Model Update 2026-10-03 (prior run 2026-09-03)

1. What changed since the prior run

Inflation surprised higher, again on energy.

Headline HICP: the September flash is 3.8% YoY, up from 3.2% in August (Aug revised from the 3.3% flash). MoM is +0.6%.
Energy HICP: 18.8% (from 14.3%), contributing about 1.7pp to headline.
Core and services: core HICP is 2.5% (from 2.4%, MoM +0.2%). Services are 3.2% (from 3.0%).
Big four: DE 3.3%, FR 3.4%, IT 4.1%, ES 5.0%.
Missing this run: core 3-month annualized and negotiated wages are not available.
ECB staff projections (Sept):
HICP 3.0% / 2.5% / 2.1% for 2026 / 27 / 28, with a peak of 3.6% in Q4 2026.
Core 2.5% / 2.6% / 2.3%.
Compensation per employee 3.3% in each year.
September already exceeds the staff-projected Q4 peak.

ECB.

The prior state's 2.00% deposit rate is superseded. The ECB hiked 25bp on 11 June and another 25bp on 10 Sep, effective 16 Sep.
The deposit facility rate is 2.50% (MRO 2.65%, MLF 2.90%). Meeting-by-meeting guidance is retained.
Market pricing for the next three meetings:
October hike odds are negligible or below 30%.
The next hike is not fully priced until January.
Up to three more hikes are seen over the coming year.
€STR was 2.19% and about 40bp of cumulative hikes were priced by end-2026 (as of 9 Sep).
Meeting-by-meeting OIS figures are unavailable.
Balance sheet: APP/PEPP run-off continues, and excess liquidity fell about €101bn to €2,117bn.
Dissent at the September meeting: not sourced.

Rates and spreads.

10Y Bund: ~3.47% in the latest quote (3 Oct), versus 3.36% at the prior run (+11bp). It touched a 17-year high, with quotes as high as 3.64% on 2 Oct, before easing below 3.45%.
2Y Schatz: 3.00% (2 Oct), versus 2.98% prior.
OAT-Bund: about 130-152bp across 2-3 Oct quotes (central ~140bp), the widest since 2011-12, versus 80.4bp prior. This follows the French budget presentation.
BTP-Bund: 116.5bp at the 1 Oct close and 122.5bp in the latest quote. It was unavailable last run.
Unavailable: EUR/USD, the euro 5y5y swap and the 10y inflation swap.

Equities.

STOXX Europe 600: 631.35, versus 646.32 prior (−2.3%). The 52-week high is 660.51 (11 Aug).
Valuation multiples: forward P/E 15.37 and trailing 19.67 are still dated 30 Jun 2026 and flagged STALE.
Mechanically re-scaled by price (631.35 / 641.73), they would be about 15.12 and 19.35, ignoring EPS revisions.
Earnings growth: expected Q3 earnings growth is +19.4% y/y, or +9.9% ex-energy. One bank sees eurozone EPS +15% in both 2026 and 2027.
Euro Stoxx 50: 6,320.26 (30 Sep). Its index forward P/E is unavailable.

Forces.

TTF gas: EUR 71.9-76.5/MWh (2 Oct), with a 30-day average of 75.89 (range 70.51-82.51). Prior was 73.2-73.7, so roughly flat-to-higher.
Brent: USD 99.8-102.7, versus ~95 prior.
Supply news:
Saudi Arabia restarted the East-West pipeline and Yanbu loadings, but Hormuz transit remains risky.
European governments are weighing an emergency oil/diesel stock release.
Fiscal:
The euro area deficit is projected at 3.6% / 3.7% / 3.6% of GDP for 2026-28.
The defence escape clause is active for 14 euro area countries.
An EDP was opened for Bulgaria.
German package news is unavailable.
Trade: the US-China "30-for-30" tariff truce covers about $60bn of goods and expires 10 Jan 2027. There is no US-EU tariff item.
Unavailable: electricity prices, unemployment and China export prices.

Ledger changes (≥0.05pp):

Energy 3y: +0.20 → +0.25. Brent is near USD 100, energy HICP accelerated to 18.8%, and core and services ticked up, so second-round pass-through into core over 3 years is more likely. All other weights are unchanged.

Scenario changes:

B: 0.40 → 0.45 (+5pp). Headline at 3.8% already exceeds the ECB's projected 3.6% Q4 peak, services are rising, and staff see core at 2.6% in 2027.
A: 0.30 → 0.28. Residual.
D: 0.15 → 0.12. Energy prices are not falling durably.
C: unchanged at 0.15. Spread widening and a 5%+ UST 10Y tighten financial conditions, offsetting ECB-hike credibility.

Verdict: model moved (modestly).

2. Conclusion flips

No flips.

Stocks vs bonds: stocks stay ahead of Bunds at 3y (0.8pp) and 10y (2.8pp).
Bund gap: −11bp, inside ±50bp.
E[pi,3y]: 2.55% (ledger) / 2.50% (scenario-weighted), between 1.5% and 3.0%.
Forward P/E gap: +22.5%, between 0% and 25%, but nearer the 25% threshold than the prior +20.9%.
Scenario B: already above 35% (0.40 → 0.45), so no new crossing.

3. Updated tables

Force ledger (pp vs 2.0% core anchor)

Force	3y	5y	10y	Change
Energy (gas, oil, electricity)	+0.25	+0.10	0.00	3y +0.05
Wages & services	+0.20	+0.10	0.00	—
Euro exchange rate	0.00	0.00	0.00	—
Fiscal impulse (German package, EU defence)	+0.15	+0.10	+0.05	—
Tariffs & trade fragmentation	+0.05	+0.05	+0.05	—
China goods deflation	−0.10	−0.10	−0.05	—
ECB balance-sheet run-off	−0.05	−0.05	0.00	—
Housing & rents	+0.05	+0.05	+0.05	—
Demographics & labour supply	+0.05	+0.10	+0.10	—
Productivity	−0.05	−0.10	−0.15	—
Sum / E[core]	+0.55 → 2.55%	+0.25 → 2.25%	+0.05 → 2.05%	3y +0.05

Scenarios

Id	Scenario	pi	p (prior → new)
A	Target landing	~2.0%	0.30 → 0.28
B	Re-acceleration	~3.5%	0.40 → 0.45
C	Disinflationary slump	~1.0%	0.15 → 0.15
D	Productivity & investment boom	~1.8%	0.15 → 0.12

E[core, 3y]

Scenario-weighted: 0.28×2.0 + 0.45×3.5 + 0.15×1.0 + 0.12×1.8 = 0.560 + 1.575 + 0.150 + 0.216 = 2.50%.
Ledger: 2.55%. The difference is 0.05pp, which passes the cross-check.

Sigma

E[pi²] = 0.28×4 + 0.45×12.25 + 0.15×1 + 0.12×3.24 = 7.171.
Variance = 7.171 − 2.501² = 0.916, so sigma = 0.96pp (prior 0.94).

Tail probabilities (scenario mixture, 0.5pp within-scenario sd)

P(pi>3%) = 0.28×0.023 + 0.45×0.841 + 0.12×0.008 = 39% (prior 34%).
P(pi<1.5%) = 0.28×0.159 + 0.15×0.841 + 0.12×0.274 = 20% (prior 21%).

Fair 10Y Bund

Component	Prior	Now
Euro r*	0.40	0.40
Expected HICP: mean(2.55, 2.25, 2.05) = 2.28 + 0.20 wedge	2.43	2.48
Term premium (raised: higher sigma, OAT-Bund ~140bp, UST 10Y 5.24%, JGB >3%, deficits 3.6-3.7%)	0.65	0.70
Fair 10Y	3.48	3.58
Actual 10Y Bund	3.36	3.47
Gap (actual − fair)	−12bp	−11bp

The gap is inside the ±50bp flag.
The model-vs-inflation-swap gap is not computable, because the 5y5y and 10y swaps are unavailable.

Fair forward P/E (STOXX Europe 600)

Method	Arithmetic	Fair fwd P/E
(a) Gordon	0.55 / (3.58 + 4.50 − [1.0 real (model assumption) + 2.48]) = 0.55 / 4.60%	11.96
(b) Rule of 20, Europe	trailing 17 − 2.48 = 14.52; ÷ 1.10 (EPS growth proxy 10%: Q3 ex-energy 9.9%)	13.20
(c) Regime median	14.0 median − 1.5 turns for inflation vol	12.50
Model average	(11.96 + 13.20 + 12.50) / 3	12.55 (prior 12.71)
Fair trailing	12.55 × 1.10	13.81 (prior 13.66)

Gaps versus the model average

Forward: the actual forward P/E of 15.37 (stale, 30 Jun) is 22.5% above the model-average fair 12.55. On the price-rescaled 15.12, the gap is 20.5%.
Trailing: the actual trailing P/E of 19.67 (stale) is 42.4% above the fair trailing 13.81. On the rescaled 19.35, the gap is 40.1%.

Implied ERP

0.55 / 15.37 + 3.48 − 3.47 = 3.58 + 3.48 − 3.47 = 3.59%.
That is versus a 4-5% norm, 0.91pp below the 4.5% midpoint (prior 3.65%).

Asset-return matrix

Stock returns: 3.6% total payout yield + EPS + rerating. Over 3 years, the P/E closes half the gap to scenario fair; over 10 years, it closes the full gap.
Bund returns: carry 3.47% + (−8.5 duration × Δyield) / 3.

Scen	p	10Y Bund (3y)	Fair P/E	EPS/yr 3y	Stocks 3y/yr	Bund 3y/yr	Stocks 10y/yr	Bund 10y/yr
A	0.28	3.20%	13.5	+5%	3.6+5−2.07 = +6.53%	3.47+0.77 = +4.24%	3.6+5.0−1.30 = +7.30%	+3.4%
B	0.45	4.30%	11.0	+4%	3.6+4−4.98 = +2.62%	3.47−2.35 = +1.12%	3.6+5.5−3.35 = +5.75%	+3.7%
C	0.15	2.40%	11.5	−2%	3.6−2−4.39 = −2.79%	3.47+3.03 = +6.50%	3.6+2.5−2.90 = +3.20%	+3.1%
D	0.12	3.50%	14.5	+8%	3.6+8−0.96 = +10.64%	3.47−0.09 = +3.38%	3.6+7.0−0.58 = +10.02%	+3.5%

Probability-weighted returns

E[stocks, 3y] = 0.28×6.53 + 0.45×2.62 + 0.15×(−2.79) + 0.12×10.64 = 1.828 + 1.179 − 0.419 + 1.277 = +3.9%/yr (prior +3.8%).
E[Bunds, 3y] = 0.28×4.24 + 0.45×1.12 + 0.15×6.50 + 0.12×3.38 = 1.187 + 0.504 + 0.975 + 0.406 = +3.1%/yr (prior +2.6%).
Stocks are ahead by 0.8pp/yr at 3y.
E[stocks, 10y] = 0.28×7.30 + 0.45×5.75 + 0.15×3.20 + 0.12×10.02 = 2.044 + 2.588 + 0.480 + 1.202 = +6.3%/yr (prior +7.1%).
E[Bunds, 10y] = 0.28×3.4 + 0.45×3.7 + 0.15×3.1 + 0.12×3.5 = 0.952 + 1.665 + 0.465 + 0.420 = +3.5%/yr (prior +3.1%).
Stocks are ahead by 2.8pp/yr at 10y.

4. Switzerland, UK & world

Switzerland

CPI: +1.0% YoY in September (0.0% m/m). It was unavailable last run.
Core CPI: +0.5%, versus 0.4% (Feb, stale) prior.
SNB: held at 0% on 24 Sep. The discount on sight deposits above the threshold is unchanged at 0.25pp.
The SNB repeated its willingness to be active in FX markets as necessary.
It noted the franc has depreciated ~3% trade-weighted since the last assessment.
EUR/CHF: no new level is available, so 0.9392 (1 Sep) is carried STALE. Market commentary reported EUR/CHF sliding as French spreads widened on 2-3 Oct.
USD/CHF: 0.8101 (1 Sep), carried STALE.
Sight deposits: CHF 454.4bn (13 Mar), carried STALE.
Read:
Strong-franc pressure eased on a trade-weighted basis over the quarter.
Renewed euro-area fragmentation (OAT-Bund ~140bp) is a fresh safe-haven channel.
With policy at the zero floor, negative-rate risk remains the SNB's fallback alongside FX intervention.
For Swiss-listed exporters: this means a less adverse trade-weighted franc than in June but renewed safe-haven risk versus the euro.

United Kingdom

CPI: 3.1% in August (prior 2.9% July), expected to rise further.
Services CPI: 3.4%, unchanged.
Core CPI: not sourced; 2.6% (Jul) carried STALE.
Bank Rate: held at 3.75% on 16 Sep, on a 6-3 vote, with three members preferring a hike to 4%. The MPC also voted to reduce its gilt stock to zero.
Unavailable: the 10Y gilt and GBP/EUR.
For European-listed companies: a hawkish-leaning BoE and rising UK CPI keep sterling-area financing costs elevated.

United States

Fed: hiked 25bp to 3.75-4.00% on 16 Sep (prior 3.50-3.75%), with the effective rate at 3.88%. The median dot is 4.1% for end-2026.
10Y UST: 5.24% (1 Oct), versus ~4.8% prior.
Core PCE: 3.0% (Aug), with headline at 3.4%. This replaces the prior ambiguous 3.7%.
DXY: ~101.5, versus ~99.4-99.8 prior, up ~2% in September.
Read: this is the main external driver behind the higher Bund term premium, and dollar strength implies a softer euro.
For European-listed companies: higher global discount rates weigh on multiples, while dollar earners gain translation support.

Japan

BoJ: hiked at its 17-18 Sep meeting. The level is not stated; it is implied at ~1.25%, since the next hike to 1.5% is priced at 90% for December.
10Y JGB: 3.092%, versus just above 3% prior.
USD/JPY: high of 158.44, versus ~158 prior.
Tokyo core CPI: 3.0%.
Read: JGB spillover adds to upward pressure on global long yields.
For European-listed companies: repatriation risk from Japanese investors is a factor for euro duration and credit funding.

China

CPI, PPI, export growth and USD/CNY are all unavailable this run.
The US-China tariff truce, expiring 10 Jan 2027, may reduce trade diversion toward Europe.
For European-listed companies: the goods-deflation channel cannot be updated this run.

Other EM

India (RBI repo, CPI) and Russia are unavailable this run.
No EM signal can be read for European-listed companies.

5. Bottom line

Euro area inflation is rising on an energy shock: headline is 3.8% and core 2.5%. The model's E[core HICP] is 2.55% / 2.25% / 2.05% at 3/5/10y, and the re-acceleration tail grew (B 45%, P(pi>3%) 39%).

Probability-weighted expected returns are +3.9%/yr for European stocks vs +3.1%/yr for Bunds over 3y, and +6.3% vs +3.5% over 10y. The Bund sits 11bp below its 3.58% fair value, and the forward P/E is 22.5% above the model-average fair multiple.

The standing asymmetry holds:

Bunds hedge only scenario C.
Scenario B hurts both stocks and nominal Bunds; euro inflation-linked bonds and short duration hedge B.
Peripheral and French spreads, already at multi-year wides, widen further in B and C.

6. Sources

+/-0.05-0.10pp precision on all weights; this is analytical framework output, not financial advice.