Key Highlights

• Fiscal, Fed, FDI and oil anchor 2026 growth outlook
• Private credit margins compress even as risks rise
• Global policy decisions will steer near-term volatility

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What you need to know

The race to a strong 2025 finish hinges on four key arguments around the 2026 outlook:

1) Fiscal stimulus as growth driver. Fiscal policy is expected to add 1% to GDP in 2026, reversing its drag in 2025. Housing affordability will be central to the Trump administration’s Q1 agenda and could lead to lower mortgage costs. However, deficit-related risk premiums are unlikely to be ignored.

2) Federal Reserve rate cuts. While a December cut is fully priced in, consensus is growing that it will be framed as hawkish, with further easing dependent on weaker data or lower inflation in March and June 2026. The upcoming Fed Chair transition also presents a risk, as markets evaluate any new leadership.

3) Foreign direct investment (FDI). An ongoing investment push, driven by AI and tariff-linked FDI deals, is expected to add to growth. The timing of job creation depends on how quickly new plants and equipment come online, a process tied closely to politics.

4) Oil. Lower gasoline prices are clearly a goal for the Trump administration, with efforts to resolve the Russia–Ukraine conflict, cut auto emissions, and potentially tap Venezuelan supply. Expectations are for global oil prices to fall to the $50–$55 range from the current $58–$63.

While markets have priced in these supports, rising job market stress, consumer-credit deterioration, and elevated bankruptcy rates pose meaningful downside risks. With major global central bank decisions and key economic data ahead, investors must balance slowing growth signals against evolving financial conditions and persistent concerns around AI valuations, crypto volatility and private-credit fragility.

Evidence of a K-shaped recovery curbs enthusiasm for the growth narrative. U.S. jobs market data remains concerning, as do rising credit card and auto defaults, and the increase in bankruptcies. Markets will weigh further evidence of a slowing economy against evolving financial conditions.

The week ahead brings central bank decisions in Australia, Brazil, Canada, Switzerland and the U.S. Economic data remain in focus, with Japan’s Q3 GDP, the U.S. labor survey for October, European Union CPI and Australian jobs. The markets also await the U.S. Supreme Court decision on tariff legality and results of peace talks between Ukraine and Russia. Jobs and inflation will also continue to dominate the global markets.

Will lower rates help or hurt private credit?

_{EXHIBIT #1: U.S. PRIVATE CREDIT LENDING MARGINS VS. MERGERS}

_{Source: BNY, Bloomberg}

Private credit firms expanded in 2022, but alternative lenders that compete with banks slowed down in 2025. The $1.7tn industry saw margins fall below 5%, with some syndicated loan deals priced even lower. However, investor demand for private credit has remained strong. Limited partners targeting private credit aim for just under 10% returns but leveraged loans are up only 7.5% in 2025. At the same time, lower interest rates are triggering more resets on floating-rate loans.

The next logical exit strategy for lenders may be mergers that provide liquidity but come with other risks. Banks are increasingly competing with private credit as deregulation revives more traditional lending models. Forecasts for merger and acquisition activity, relative to margin compression, are worth considering.

Our take: Investors remain less interested in corporate credit risks, given current yields. The risk of disruption in 2026 suggests a need for further risk premiums. iFlow data show a continued equity bias away from cyclical growth sectors and toward more defensive industries. Clients are set up more defensively in the U.S. than the equity markets suggest.

Concerns about 2026 growth appear underappreciated, based on early outlooks. Mergers and acquisitions, a key exit path for private credit, serve as a barometer for future stress and could have multiple effects on liquidity and leverage into 2026.

The correlation between rising margins and falling mergers has been notable since COVID. However, history shows that mergers tend to rise ahead of growth slowdowns, as seen in 2001. 

Forward look: Private credit and private equity in the U.S. account for $7tn of risk. This exposure sits with pensions, insurance companies and, most recently, retail investors’ retirement plans.

The risk for 2026 rests on how financial conditions – equities, housing, and credit spreads – move in a slower growth environment with curves steepening. Rollover risks for private credit are linked to higher 10-year rates, with 4.5% seen as a critical level to watch. Curve steepening helps banks but hurts private funds, which face maturity mismatches. How U.S. rates respond to a hawkish cut, additional fiscal stimulus, and a slowing labor market will 

What we’re watching

Market and Fed align on rate views

_{EXHIBIT #2: FOMC projections vs. actual Fed funds}

Source: BNY, Bloomberg

Our take: Both the Fed and the Bank of Canada (BOC) will announce rate decisions this Wednesday. The BOC, kicking off the day at 9:45 a.m. (ET), is likely to hold steady, thanks to a recent string of economic data that suggest demand in Canada is stabilizing. The Fed, on the other hand, is likely to cut rates for the third straight time this year. We expect to see some dissents, potentially from both hawkish and dovish members.

The FOMC will release its usual quarterly Summary of Economic Projections, which offer a view on 2026 rates and beyond, along with other key macroeconomic variables. We expect a wide divergence in views on policy direction for 2026, reflecting the two-way economic risks we see ahead. Interestingly, the accompanying Exhibit #2 shows that, with few exceptions, the median December rate projection has closely aligned with where federal funds end the year. Dismissing the dots entirely could be a risky practice.

Forward look: Government data will remain limited, with only a few key releases for the week. Before the FOMC decision, the October Job Openings and Labor Turnover Survey (JOLTS) will be released Tuesday. We expect it to show a continued weakness in labor demand.

The Employment Cost Index will also be released Wednesday morning. We do not anticipate a meaningful change in labor costs, either higher or lower. 

EMEA: Switzerland resolute despite softer inflation prints

_{EXHIBIT #3: SNB BALANCE SHEET, LIABILITIES}

_{Source: BNY}

Our take: The Swiss National Bank (SNB) is expected to keep rates on hold. News that the Swiss government is moving ahead with a U.S. trade deal should soothe fears that the economy faces even stronger export-related headwinds. The recent inflation print has led the market to revisit expectations of further easing and even intervention, but we believe Chairman Martin Schlegel will stand by his view that the bar for negative rates remains extremely high. Furthermore, the persistence of inflation in European and global economies continues to widen price differentials and hurt the franc (CHF) in real terms – leaving sufficient room for nominal effective exchange rate (NEER) appreciation.

In other G10 economies, such as Canada and Australia, tightening is being priced back into the cycle. We also expect sufficient real effective exchange rate (REER) gains in Asia to strengthen purchasing power, providing a tailwind for Swiss exports, which tend to be price-inelastic globally.

We also stress that negative headline rates should not be considered the first policy option. Exhibit #3 shows there is still a large buffer of non-sight liquidity, in the form of debt certificates and repo operations. These can be quickly converted to sight deposits, widening the spread between benchmark and realized money market rates, which currently stands at about 5bp.

Hence, even at zero headline rates, effective rates can drift materially negative, and there will still be funding interest either way. Crucial for the longer-term outlook will be the SNB’s conditional inflation forecast. As long as inflation does not sustain a move into negative territory, the SNB is unlikely to shift its central scenario toward easing and opt for an extended pause.

However, the SNB should also note recent downside inflation surprises in Sweden and the Czech Republic – both with exceptionally large exposures to Germany’s industrial supply chain. Switzerland is similarly affected by falling demand for capital goods. As China moves up the value chain, the country can ill afford to be caught off guard by competitiveness and capacity pressures – despite the protections of the Sino-Swiss Free Trade Agreement.

Forward look: Key rate decisions in the region this week will come from EMEA high-yielders Türkiye and South Africa. Both are expected to cut rates. With the Fed also set to ease, there is sufficient capacity to move without disrupting real rates.

The TCMB is expected to cut by 100bp to keep real rates in the high single digits. Greater market appreciation could follow if it mirrors Central and Eastern European peers by calling for stronger fiscal restraint. However, the path for TCMB rates has reached an equilibrium condition. Finance Minister Mehmet Şimşek recently noted that, excluding gold, Türkiye has eliminated its current account deficit, potentially opening the door to stronger capital inflows.

However, gold’s impact remains significant. As it is often used as an inflation hedge, its demand poses ongoing risks to the balance of payments.

South Africa continues to rank strongly in iFlow for asset allocation, but we see reason for caution on excessive exposure, given current ZAR valuations. Elsewhere, data across Western Europe remain limited as the European Central Bank (ECB) prepares for its final meeting of the year, and most price action will follow the Fed decision.

APAC: China exports, credit and inflation, and RBA and BSP meetings

_{EXHIBIT #4:  FALTERING CHINA EXPORTS DRAGGED BY U.S. AND JAPAN}

_{Source: BNY, Bloomberg}

Our take: This week across Asia-Pacific (APAC), the spotlight will be on several key economic releases.

China is set to publish data on November exports, credit and inflation, while South Korea will report on bank lending and its export performance from December 1 to 10. Taiwan will unveil November export figures, Malaysia will release October industrial production and manufacturing sales, and Indonesia will update on consumer confidence. India will report November inflation statistics.

In addition, Australia, South Korea and the Philippines are providing employment data. Japan is scheduled to release several updates, including real cash earnings, M3 money supply, and the quarterly Business Survey Index (BSI) – all ahead of next week’s Bank of Japan (BoJ) policy meeting.

China’s and Taiwan’s November export data will be closely monitored for signs of increased trade volume following the U.S.-China trade truce reached at the Asia-Pacific Economic Cooperation (APEC) summit in early November. With South Korea reporting accelerated semiconductor exports in November, it is anticipated that Taiwan’s exports – particularly in the semiconductor sector – will maintain robust momentum during this period.

Notably, Taiwan’s October exports surged by 49.7% y/y, with information and communications components exports rising an impressive 138% y/y. Regarding China, the focus will be on the trajectory of trade growth after a 1.1% y/y contraction in October, driven primarily by reductions in trade with the U.S. (–25% y/y), Japan (–5.7% y/y), and South Korea (–12.5% y/y). China’s November credit figures may reveal a continued weakening trend despite ongoing liquidity injections. The conventional transmission mechanism linking credit expansion to money growth appears to have weakened, partly due to structural shifts such as the increasing prevalence of alternative funding channels, including government special refinancing bonds, corporate bond financing, and loans written off amid ongoing deleveraging efforts. In October, aggregate financing and loans by financial institutions registered growth rates of 8.5% and 6.49% y/y, respectively.

China’s inflation has shown some stabilization, with the headline figure moving above zero in October. While disinflationary pressures persist, incremental month-on-month readings may serve as indicators of domestic demand. South Korea’s bank lending data will be under close observation as authorities heighten their focus on financial market stability; this includes monitoring whether lending data reflects recent reports of certain Korean banks suspending new home purchase loans.

In India, attention remains on CPI trends, particularly the evolution of food prices, which have significantly distorted headline inflation to the downside. The latest data show India’s headline CPI at 0.25%, with food inflation at –5.02% y/y.

Japanese data will be closely watched, especially October real cash earnings and Q4 BSI industry survey. Further earnings and growth momentum, along with elevated inflation (headline 3.0%, core ex-fresh food and energy at 3.1%) may prompt the BoJ to resume its tightening cycle.

In terms of monetary policy, the Philippine central bank (BSP) and Reserve Bank of Australia (RBA) will convene this week. The sharp deterioration of macro conditions has led the BSP to consider a fifth consecutive rate cut, while the RBA is expected to maintain status quo due to tight labor markets and brewing inflationary pressure. 

Forward look: APAC assets will be influenced by global dynamics and external factors, especially the Fed decision this week. We were encouraged by the stabilization of investor flows, as aggressive foreign equity outflows in November have subsided, with some early sign of inflows. That said, Asia risks remain susceptible to abrupt asset volatility, as observed in the crypto complex last week.

Looking ahead, the regional market will focus on China’s Central Economic Work Conference, typically held in mid-December, which sets the economic agenda for 2026. The actual macro targets for the fiscal deficit ratio, bond issuance and the growth target will be released in Q1 2026. The expectation is for continued fiscal support, along with a focus on high-tech development and industrial policy.

Bottom line

As markets navigate a late-cycle slowdown, the balance between fiscal expansion, a potentially hawkish Fed easing path, and global policy shifts will shape the trajectory into 2026. Private credit rollover risks – especially in a steeper-curve environment – alongside slowing labor markets and softer consumer fundamentals suggest that investors should maintain disciplined risk management and lean toward quality, liquidity, and defensiveness. A successful finish to 2025 hinges on whether easing financial conditions can offset mounting credit stress and geopolitical uncertainty while still sustaining capital formation and earnings resilience into the new year.

Calendar for December 8–12

Central bank decisions

Australia, RBA (Tuesday, December 9) – The RBA is a strong candidate to be among the first G10 central banks to tighten next year, and current pricing points to a 25bp move by Q3. Governor Bullock is doing little to dispel such views, noting in a recent Senate testimony that the central bank is “ready to act” in the event that inflation surprises to the upside. Furthermore, fiscal spending remains elevated and will require a corresponding offset in real rates. Our data indicate some pricing of a stronger dollar (AUD) is emerging, but investors appear to be awaiting further RBA guidance before materially adding to holdings.

Canada, BOC (Wednesday, December 10) – The BOC is expected to keep rates steady this Wednesday. We previously expected the bank to cut this month, but Canadian economic data have been more resilient than anticipated, and inflation remains slightly elevated. Our data suggest that cross-border clients are aligned with this view, as hedge-related positions have halved since the Q1 lows, despite ongoing uncertainty in trade relations with the U.S.

U.S., FOMC (Wednesday, December 10) – We expect the FOMC to cut rates this week, but the guidance for subsequent months will likely be vague, with data dependence back in vogue now that new readings on the current state of the economy are finally arriving. A new set of dots will be released, although we do not expect them to coalesce around a clear rate path for 2026. Although the market has returned to pricing a cut as the base case, our data show that cross-border dollar holdings have not materially diverged from changes in underlying asset performance.

Brazil, COPOM (Wednesday, December 10) – Another hold is the base case for COPOM. The real rate buffer in Latin America is likely to remain dominant heading into 2026, and the latest OECD forecasts point to a much-improved inflation outlook that should generate sufficient policy space. As is often the case, COPOM can wait for the FOMC decision before taking a firmer view, and the consensus around looser U.S. financial conditions should help limit pressure on the real (BRL). It remains to be seen if tariff adjustments in the U.S. have shifted the underlying policy outlook.

Philippines, BSP (Thursday, December 11) – We expect the BSP to deliver a fifth straight rate cut, bringing the rate to 4.50% – a total of 125bp this year or 200bp in the current easing cycle since mid-June. Further stimulus is needed to counter worsening domestic conditions and ongoing target inflation, with headline inflation at 1.7% versus the 2%–4% inflation target range. We will be looking for policy guidance for 2026. BSP’s October downward revision of CPI to 3.1% and 2.8% for 2026 and 2027 suggests there is still room for easing in 2026. Looking ahead, economic growth momentum is likely to become a more important driver than price stability.

Switzerland, SNB (Thursday, December 11) – We expect the SNB to hold rates for their final decision this year. SNB President Schlegel has maintained that the bar for negative rates remains high, while the gradual resolution of trade issues with the U.S. should help limit additional downside risk to the central bank’s conditional inflation forecast. Furthermore, a resolutely neutral ECB should also provide limited pass-through support for Swiss inflation through the exchange rate. However, we note that the franc will remain one of the most favored names in G10 during periods of risk aversion, especially now that idiosyncratic factors have weighed on yen (JPY) and U.S. dollar (USD) performance as equity markets struggled. We believe SNB rates will stay on hold for much of next year, though if the ECB reacts to a downturn in European and global growth, the SNB may signal greater vigilance against deflation risk.

Türkiye, TCMB (Thursday, December 11) – Cautious easing will remain the norm for the TCMB, and as inflation approaches 30% y/y, the real rate buffer should be sufficiently strong to limit outflows. Our data point to some improvement in lira (TRY) flow performance, though some gains may reflect hedge unwinding, as underlying asset flows remain challenged. Carry trades have struggled throughout the past few months. We doubt there will be strong appetite for renewed exposure toward year end, though the Fed decision may influence the general performance of carry currencies and affect the scale of the TCMB’s move.

Peru, BCRP (Thursday, December 11) – The BCRP will hold rates at 4.25% at its December meeting. With the Fed likely to cut and open up an even larger rate gap versus Peruvian nominal and real rates (which are approaching 3% based on Lima inflation), the currency should remain stable. There is much greater investor focus on political developments as investor flows into Latin America are aligning with binary policy outcomes, whether realized or perceived. We continue to see Latin American assets performing well, but with low nominal rates, hedge ratios for Peru will remain more elevated compared to peers.

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