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: 2026-08-20 · Analytical framework output — educational tool only, not financial advice. Do your own research.

MACRO MODEL UPDATE — 2026-08-20

(prior run: 2026-08-20 — same-day refresh; deltas are small by construction)

1. WHAT CHANGED SINCE THE PRIOR RUN

Data (new or confirmed this run). July CPI confirmed at 3.4% y/y headline / 2.5% core, MoM +0.1% / +0.2% (Cleveland Fed; BLS). June PCE 3.7% headline, core PCE 3.3% (BEA) — both unchanged. Cleveland Fed nowcasts (updated 08/20) put August CPI at 0.35% MoM / 3.36% y/y, core CPI 0.20% / 2.38%, PCE 0.34% / 3.73%, core PCE 0.27% / 3.34% (July core PCE nowcast 3.29%); the 2026:Q3 annualized nowcasts are much softer — CPI 1.16%, core CPI 1.91%, PCE 2.33%, core PCE 2.91% SAAR. A 3-month annualized CPI print and a supercore-services figure are not in this run's clippings (cpichart describes the concept only) — unavailable, no number supplied.

Market-implied. 10y breakeven 2.30% (8/18, from 2.28%), 5y breakeven 2.28% (8/19, from 2.21% — +7bp). 5y5y forward: unavailable this run. 10Y 4.71% (8/18, +6bp vs prior 4.65%), 2Y 4.19%.

Fed. Target range 3.50–3.75%, held 9–3 on 7/29 (dissents Hammack, Kashkari, Logan, all for +25bp); IORB 3.65%, primary credit 3.75%, ON RRP 3.50%. July minutes (8/19): officials saw a need to hike if inflation does not cool, and most now expect a September hike. CME FedWatch numbers are absent this run; a non-CME tracker shows Sept 16 hike probability 34.4%, Oct 28 15.6%, Dec 9 14.0% (next-meeting 37%, EFFR 3.630%) — that tracker's implied-rate column (3.13%/3.10%/3.06%, i.e. −50 to −58bp vs EFFR) is internally inconsistent with a 37% hike probability and is not used. Prior ~42% Sept-hike pricing therefore reads modestly lower on the substitute source. No FOMC since the prior run, so no new SEP (dot plot also flagged missing).

Equities. S&P 500 7,693 (8/18 close; 7,710 in the FactSet report) vs ~7,715 prior. Forward P/E 20.00 (streetstats, FactSet, stockmarketperatio; Barron's 21.42 on a different estimate basis). Trailing P/E dispersion is wide: 26.49 (Barron's, the series used as trailing GAAP), 28.2 (FactSet), 29.65–29.71 (us500/multpl), 23.56 (streetstats). NTM EPS $384.63, TTM EPS $326.52 (streetstats) → implied NTM step-up +17.8%. Equal-weight forward P/E unavailable.

Forces. WTI $85.81, Brent $91.87 (5th straight gain, Hormuz risk); Hormuz flows near standstill vs ~20 mb/d pre-conflict, Gulf output 8.3 mb/d below pre-war, but IEA cut 2026 demand by 1.6 mb/d (Q2 −4.9, Q3 −2.8 mb/d). CPI energy −1.5% MoM / +14.7% y/y; shelter +0.1% MoM (~2/3 of the all-items rise). Tariffs: effective rate 7.1% (June), down from 11% late 2025 after the Feb 20 SCOTUS IEEPA ruling, with new levies announced late July; China effective 23.2%, steel/aluminium 40.9%, autos 13.2%; St. Louis Fed reports tariff inflation effects have stabilized. Deficit ~6% of GDP FY25/FY26 with debt/GDP near its WWII-era peak (Fed MPR). Yields "tumbled Wednesday following a Treasury Department announcement" (details truncated in the clipping). Hyperscaler AI-capex news, national AHE, CPI electricity and China PPI are all absent — prior readings carried forward flagged stale.

Ledger changes (both −0.05, 3y only).

Deglobalization/tariffs 3y 0.10 → 0.05: measured effective tariff rate is 7.1% versus 11% in late 2025 and the St. Louis Fed finds tariff pass-through to inflation has stabilized.
Demand/output gap 3y −0.20 → −0.25: the IEA's 1.6 mb/d demand downgrade plus Cleveland Fed Q3 core-PCE nowcast of 2.91% SAAR (vs 3.34% y/y) point to more near-term slack than the prior run assumed.

Scenario change. B 0.25 → 0.24, A 0.50 → 0.51 (<5pp, no justification required, but driven by the hawkish minutes and three hike dissents, which argue against near-term fiscal-dominance capture).

Verdict: model moved (marginally) — 3y ledger inflation 2.80% → 2.70%; 5y/10y unchanged.

2. CONCLUSION FLIPS

No flips. Bonds still lead stocks at 3y and stocks still lead at 10y; the fair-vs-actual 10Y gap stays beyond the ±50bp line (−64bp, narrowed from −70bp); E[π,3y] stays between 2.0% and 3.0%; the forward P/E gap stays between 0% and +25% (+23%); no scenario crossed 35% (A already above at 0.51).

3. UPDATED TABLES

Force ledger (pp on a 2.0% core-PCE anchor)

Force	3y	5y	10y	Δ
Fiscal/debt premium	0.45	0.50	0.55	—
Shelter	0.15	0.15	0.10	—
Immigration/labor supply	0.20	0.20	0.15	—
AI buildout	0.25	0.15	0.05	— (stale: no capex data)
Climate/insurance/grid	0.10	0.15	0.20	—
Healthcare	0.10	0.10	0.15	—
Deglobalization/tariffs	0.05	0.10	0.10	3y −0.05
Demographics	0.00	0.10	0.20	—
Geopolitical mean	0.20	0.10	0.05	—
AI productivity	−0.25	−0.40	−0.60	—
AI-bust overhang	−0.15	−0.05	0.00	—
China goods deflation	−0.05	−0.10	−0.10	— (stale: no PPI data)
Tech baseline deflation	−0.10	−0.10	−0.10	—
Demand/output gap	−0.25	−0.05	0.00	3y −0.05
Net	+0.70	+0.85	+0.75
E[core PCE]	2.70	2.85	2.75	3y −0.10

Arithmetic, 3y: positives 0.45+0.15+0.20+0.25+0.10+0.10+0.05+0.00+0.20 = 1.50; negatives −0.25−0.15−0.05−0.10−0.25 = −0.80; net +0.70; 2.0+0.70 = 2.70%. 5y: 1.55 − 0.70 = +0.85 → 2.85%. 10y: 1.55 − 0.80 = +0.75 → 2.75%.

Scenarios

ID	Name	π (core PCE)	p	Δp
A	Grind-down	~2.8%	0.51	+0.01
B	Fiscal dominance/debasement	~4.0%	0.24	−0.01
C	AI capex bust	~1.4% (recession)	0.15	—
D	AI productivity boom	~1.8%	0.10	—

Scenario-weighted π(3y) = 0.51(2.8) + 0.24(4.0) + 0.15(1.4) + 0.10(1.8) = 1.428 + 0.960 + 0.210 + 0.180 = 2.78%, versus ledger 2.70% → cross-check gap 0.08pp (inside ~0.15pp). Variance = 0.51(0.022)² + 0.24(1.222)² + 0.15(−1.378)² + 0.10(−0.978)² = 0.0002 + 0.3584 + 0.2848 + 0.0957 = 0.7391 → σ ≈ 0.86pp. P(π>3%) ≈ 0.39 (all of B plus ~30% of A's dispersion); P(π<2%) ≈ 0.22 (all of C plus ~70% of D).

Fair 10Y build

Component	Value
r*	1.45%
Expected CPI (10y model PCE 2.75 + 0.30 wedge)	3.05%
Term premium (σ 0.86pp, ~6%-of-GDP deficit, record debt/GDP)	0.85%
Fair 10Y	5.35%
Actual 10Y (8/18)	4.71%
Gap	−64bp (fair above market; in breach of ±50bp, narrowed from −70bp)
Model 10y CPI vs 10y breakeven (2.30%)	model 75bp above market

Fair forward P/E (three methods)

Method	Arithmetic	Fair fwd P/E
(a) Gordon	0.70 / (5.35 + 3.75 − [2.0 real + 3.05 CPI]) = 0.70/0.0405	17.3
(b) Rule of 20	(20 − 3.4) = 16.6 trailing; ÷1.12 smoothed EPS growth	14.8
(c) Regime median − vol turns	17.5 median (3–4% CPI regime) − 1.0 turn for σ 0.86pp	16.5
Average	(17.3 + 14.8 + 16.5)/3 = 48.6/3	16.2

Actual forward P/E 20.00 is +23% above the model-average fair multiple (prior +20%; still below the 25% line — part of the drift is method precision, not price, since the index and multiple barely moved).
Fair trailing multiple = 16.2 × 1.12 = 18.1; actual trailing GAAP 26.49 is +46% above it (prior ~+39%, on a 26.2 trailing print and a slightly higher implied fair trailing).
Implied ERP: solving 0.70/20.0 = 3.50% = y + ERP − 5.05% gives 3.84% against the actual 10Y (3.20% against the model's fair 10Y), versus the 3.5–4% norm band.

Asset-return matrix (3y horizon; duration ~7.5)

Scen.	p	10Y in 3y	Fair fwd P/E	EPS/yr	Stocks/yr	10Y Tsy/yr
A	0.51	4.75%	17.5	+7.5%	+4.3%	+4.6%
B	0.24	6.00%	14.0	+9.0%	−0.9%	+1.5%
C	0.15	3.00%	16.0	−5.0%	−10.9%	+9.0%
D	0.10	4.25%	21.0	+13.0%	+15.7%	+5.9%

E[stocks,3y] = 0.51(4.3) + 0.24(−0.9) + 0.15(−10.9) + 0.10(15.7) = 2.193 − 0.216 − 1.635 + 1.570 = +1.9%/yr. E[bonds,3y] = 0.51(4.6) + 0.24(1.5) + 0.15(9.0) + 0.10(5.9) = 2.346 + 0.360 + 1.350 + 0.590 = +4.6%/yr. 10y horizon (P/E drag amortized over 10 years): stocks A +6.4%, B +5.8%, C +2.2%, D +12.5% → 0.51(6.4) + 0.24(5.8) + 0.15(2.2) + 0.10(12.5) = 3.264 + 1.392 + 0.330 + 1.250 = +6.2%/yr; bonds A 4.8%, B 5.3%, C 3.9%, D 4.4% → 2.448 + 1.272 + 0.585 + 0.440 = +4.7%/yr.

4. EUROPE & WORLD

Euro area. HICP 2.9%, core 2.5% (July, unchanged vs prior). ECB deposit rate 2.25% (unchanged; raised from 2.00% on 10 Jun 2026). Market pricing for the next moves is represented this run only by the Q3 SPF: modal DFR 2.25% in Q3 2026, 2.50% by Q4 2026/Q1 2027, peak ~2.50%, easing to ~2.00% medium term — the prior run's ">90% priced Sept hike" is not in this run's clippings and is carried forward flagged stale. The FT benchmark quotes a eurozone 10Y at 2.17%, which cannot be reconciled with the prior ~3.25% Bund (a 108bp one-day move); the prior 3.25% is carried as the working Bund level, flagged stale/disputed. BTP-Bund spread unavailable → ~80bp carried, stale (no ≥20bp flag possible). EUR/USD ≈ 1.17, derived from SNB cross rates (0.9334 EUR/CHF ÷ 0.7979 USD/CHF), consistent with the SPF's ~1.16 H2-2026 path. For European-listed companies: unchanged 2.9%/2.5% inflation with a policy path drifting toward 2.50% keeps euro funding costs rising slowly while a ~1.17 euro trims translated dollar revenue.

Switzerland. CPI 0.4% y/y (July) carried forward, stale — no figure in this run's clippings. SNB policy rate 0.00% (unchanged). EUR/CHF 0.9334 (20.08) vs 0.9405 (19.08) and the prior 0.934–0.9405 band; USD/CHF 0.7979 from 0.8109 in a day — renewed strong-franc pressure against the dollar (~1.6%) with only mild firmness versus the euro. For Swiss-listed exporters, a sub-0.80 dollar franc mechanically compresses reported dollar-zone revenue.

UK. CPI 2.9%, core 2.6% (July, both unchanged); Bank Rate 3.75% held (decision published 30 July, next 17 September); 10Y gilt 3.68% (new series this run). Sterling issuers face an unchanged policy rate with inflation still ~0.9pp above target.

Japan (global force). 10Y JGB 2.853%, down ~8bp from ~2.93–2.95% — a marginal easing of the JGB-led upward pull on global long yields; BoJ rate (1.00%) and USD/JPY (~156–159.5) carried forward, stale. China (global force). No new PPI/CPI data — PPI −3.5% y/y, CPI +0.5% carried forward, stale; the goods-deflation channel into European import prices is therefore unverified this run.

5. BOTTOM LINE

Ledger-implied core PCE eases at the 3y point to 2.70% (5y 2.85%, 10y 2.75%) as a measured 7.1% effective tariff rate and an IEA-flagged demand contraction offset still-hot 14.7% y/y energy and a hawkish Fed minute, with σ 0.86pp, P(π>3%) ≈ 0.39 and P(π<2%) ≈ 0.22. The model's probability-weighted expected returns are stocks +1.9%/yr vs bonds +4.6%/yr at 3y (bond lead widened to ~2.7pp from ~1.8pp on the 6bp yield rise) and stocks +6.2%/yr vs bonds +4.7%/yr at 10y; the tail that grew is the residual A (0.51) as B slipped to 0.24 on the three hike dissents and September-hike minutes. The standing asymmetry is unchanged: nominal Treasuries hedge only scenario C, scenario B damages stocks and nominal bonds together (stock-bond correlation turns positive above ~3% inflation), and TIPS or short duration are the instruments that carry B.

6. SOURCES

Cleveland Fed, Median CPI — https://www.clevelandfed.org/indicators-and-data/median-cpi
Cleveland Fed, Inflation Nowcasting — https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting
BEA, PCE Price Index — https://www.bea.gov/data/personal-consumption-expenditures-price-index/
BEA, Core PCE Price Index — https://bea.gov/data/personal-consumption-expenditures-price-index-excluding-food-and-energy
FRED, CPI all items — https://fred.stlouisfed.org/graph/?graph_id=924897
cpichart.com, US CPI report — https://cpichart.com/us-cpi/
FRED, DGS10 — https://fred.stlouisfed.org/series/DGS10
FRED, DGS2 — https://fred.stlouisfed.org/series/DGS2
FRED, T5YIE — https://fred.stlouisfed.org/series/T5YIE
FRED, T10YIE — https://fred.stlouisfed.org/graph/?id=T10YIE
FOMC statement, 29 Jul 2026 — https://www.federalreserve.gov/newsevents/pressreleases/monetary20260729a.htm
FOMC implementation note, 29 Jul 2026 — https://www.federalreserve.gov/newsevents/pressreleases/monetary20260729a1.htm
AP News, Fed expected to hold — https://apnews.com/article/federal-reserve-inflation-interest-rates-iran-war-ad10c177cb8d96f9e3ed122e12352a74
rateprobability.com, Fed rate odds — https://rateprobability.com/fed
CNBC, July 2026 Fed minutes — https://www.cnbc.com/2026/08/19/fed-minutes-july-2026-officials-saw-need-for-rate-hike-if-inflation-doesnt-cool.html
Federal Reserve, Monetary Policy Report July 2026 — https://www.federalreserve.gov/monetarypolicy/files/20260710_mprfullreport.pdf
streetstats, S&P 500 valuation — https://streetstats.finance/valuation/market
FactSet Earnings Insight — https://www.factset.com/earningsinsight
Barron's, P/Es & yields on major indexes — https://barrons.com/market-data/stocks/us/pe-yields
multpl, S&P 500 P/E — https://www.multpl.com/s-p-500-pe-ratio
us500, S&P 500 P/E — https://us500.com/tools/data/sp500-pe-ratio
stockmarketperatio, S&P 500 P/E — https://www.stockmarketperatio.com/
IBTimes SG, oil prices/Hormuz — https://www.ibtimes.sg/oil-prices-rise-fifth-session-brent-nears-92-hormuz-risks-92518
BLS, CPI Summary — https://www.bls.gov/news.Release/cpi.Nr0.Htm
BLS TED, consumer prices up 3.4% — https://www.bls.gov/opub/ted/2026/consumer-prices-up-3-4-over-the-year-in-july-2026.htm
Dallas Fed, Texas economy/wages — https://www.dallasfed.org/research/swe/2026/2618
Penn Wharton Budget Model, effective tariff rates — https://budgetmodel.wharton.upenn.edu/p/2026-08-10-effective-tariff-rates-and-revenues-updated-august-10-2026/
St. Louis Fed, tariff effects on inflation — https://www.stlouisfed.org/on-the-economy/2026/aug/tariff-effects-inflation-stabilize-recent-months
ECB Data Portal, inflation — https://data.ecb.europa.eu/key-figures/inflation-and-other-prices/inflation
Macrotrends, ECB deposit facility rate — https://www.macrotrends.net/3317/euro-area-ecb-deposit-facility-rate
FT markets, bond and interbank rates — https://markets.ft.markitdigital.com/data/bonds
ECB Survey of Professional Forecasters, Q3 2026 — https://www.ecb.europa.eu/stats/ecb_surveys/survey_of_professional_forecasters/html/ecb.spf2026q3.en.html
ONS, UK consumer price inflation — https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/latest
Bank of England, Bank Rate — https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate
SNB, current interest and exchange rates — https://www.snb.ch/en/the-snb/mandates-goals/statistics/statistics-pub/current_interest_exchange_rates
SNB homepage — https://www.snb.ch/en/
Trading Economics, Japan 10Y government bond yield — https://tradingeconomics.com/japan/government-bond-yield

±0.05–0.10pp precision on all weights; this is analytical framework output, not financial advice.