MUFG 2026 Strategy Outlook – Smooth Sailing Ahead? (Podcast Edition)

Welcome to the MUFG Global Markets Podcast. I'm John Cook, and today I'm joined by George Goncalves, MUFG's Head of U.S. Macro Strategy, and Agron Nitsai, MUFG's U.S.

Desk Economist, for a special podcast on our 2026 Macro-to-Market Outlook. It's Wednesday, January 7th, 2026. George, welcome back to the podcast, and Agron, welcome.

I believe it's your first time with us. Long overdue. I'm excited to do it.

It's great to be out, and I look forward to the conversation. Yeah, and John, it's been a while for us as well, and it's great to finally get Agron on, as you said, and in today's podcast, we're going to discuss our house views. Yeah, I think we're overdue, for one, and we've been talking about having Agron join for forever, so yeah, definitely excited.

To get into today's episode, as I kind of alluded to, you and your team recently published your 2026 Macro-to-Markets Outlook, entitled Smooth Sailing Ahead, and I will emphasize that that ends with a question mark, so I think the idea is to kind of go over that piece and more broadly review your thoughts heading into 2026 and your outlook. George, given that we've got a lot of ground to cover, I'd suggest that we break the episode into parts. You can kind of set the stage with the base case view, then we can turn it over to Agron to do the underlying kind of rationale for that view from an economic and other perspective, and then we can maybe bring it back to you to talk about what are the implications for the Fed, what are the implications for the markets.

How does that sound? Sounds great. Okay, cool.

So, right into it. George, as discussed, big picture. Judging by the tone and analysis in your team's report, you appear a bit, I guess I'll call it cautious on the macro backdrop, and obviously it's hard to get a sense of what everyone's thinking going into this, but I've certainly heard others who are projecting what I'd characterize as a more optimistic macro outlook, including some are super bullish.

So I guess back to the question, help us understand your kind of caution heading into financial markets in 2026. Absolutely. So I think maybe kind of setting the stage, one, kind of paraphrase a saying in the sense that be cautious when others are greedy and be greedy when others are cautious.

I think the general consensus is pretty optimistic for another sort of kind of banner year, and it's understandable why, which we'll get into in a moment with our view as well as some of the risks to our view. But I do think starting points matter, especially for market valuations, financial conditions more broadly. But that said, it is hard to be too bearish in the first half of the year.

So we kind of characterize a very big picture of this 2026 might end up optically seeming like it's smooth sailing until it's not. And it might end up being a tale of two halves, where the beginning of the year, we have some of the benefits of the one big beautiful bill tax impulse, the fiscal impulse in general coming from the pent up demand from the government reopening in the fourth quarter. We have the World Cup kind of setting up in Q2 into the early part of summer, fourth of July, our 250th anniversary in the U.S., I'm sure there's gonna be some extra spending on that too.

No doubt. It's hard to get too bearish in the beginning of the year. But we do think that kind of sets up for the head fake of what the true underlying strength is in the economy.

And as you'll hear from Agron in a moment, a lot of last year, going back to this whole starting points concept, last year, the wealth effect, the AI spending drove a lot of both the markets and the economy. But for us, we don't think that's enough. We think we need to kind of see more of a broadening out.

And so we have our doubts. It's going to be just always smooth sailing from here. Yeah, I mean, I think that's that's pretty that's pretty fair.

You know, I mean, using a broad, broad brush, you know, risk assets and on various measures are kind of at, you know, at all time or near all time highs. So as you as you point out, starting points matter. So, Agron, let's get into some of the specific examples that underlie the outlook for growth.

Is it sustainable? I'd also like to touch on the labor market. That's been that's been a conundrum for many recently in this sort of like low, higher, low fire environment.

Will that continue? And then also inflation, you know, that's that's it's been relatively benign. You know, what's your view on that going forward?

Thanks, Sean. So the big question really is, as of right now, it's difficult to say with any certainty whether it's providing this big productivity boom that everyone's expecting. But nevertheless, it has been boosting the real economy.

We saw it in fixed investment growth in the first half of twenty twenty five. We see it in non-residential construction employment, especially for data centers. And we see in the S&P and this has been really boosting household wealth, especially for those wealthy Americans that at the end of the day really drive consumer spending in the United States.

This is the big reason why we continue to see strong aggregate consumer spending. We saw it in Q3, Q2 and Q1 of twenty twenty five. And this is despite real incomes really not growing.

That's kind of this element of this low, higher environment where we're not really adding jobs, but people are still spending money. And this is something that you you and the team have been talking about for a while. It's like, you know, the the and why the stock market is so important to the real economy.

Absolutely. It goes back to the whole K shaped economy where you have those that are trending upward, really, really driving growth. Then you have the lower income households that are falling behind in a sense.

The big question is in twenty twenty six, can this continue? We already saw that AI related fixed investment did slow pretty substantially in Q3. But to really for growth to to broaden out to other industries and to have a robust economic growth, we need to see non AI sectors starting to grow.

The goods industry in particular has been really struggling, especially if we look at the auto sector. That is, since the passing of the one big beautiful bill, it's no longer really being supported by a lot of the related subsidies. So this industry and overall goods are probably going to continue to struggle in twenty twenty six.

Now, going back to your question about the labor market, what does all mean? AI, it can boost the economy in dollar terms, but it's really a small subset of overall employment. So as long as growth in the non AI sectors are weak, we can continue to expect weak labor demand for the vast majority of the US economy.

Now, with respect to the unemployment rate, as it stands, it's at four point six percent and a consensus forecast or huddle around four and a half percent for the duration of twenty twenty six. If you were to chart this, you would see just a line moving sideways, which historically is very uncommon. The unemployment rate either trends upward or trends downward.

So this is a would be a strange anomaly if this this consensus forecast actually materialized in that way. We see a more distinct and stronger probability of the unemployment rate trending upward toward five percent for the reason that we don't see labor demand strongly picking up in the non AI industries that comprise the vast majority of the labor market. With respect to inflation, it's been slowly trending down despite core goods prices remaining elevated from tariffs.

The tariff effect has potentially peaked. It's remains to be seen, but if it has peaked, that's going to support accelerated disinflation. But even if it hasn't, the core services components which really hold the biggest weight in the CPI and PCE basket, those are the ones that are cooling a little bit more rapidly, especially in housing.

And if we continue to see weak housing demand, it's going to continue applying downward pressure on housing inflation. So from that perspective, inflation might be a little bit stickier in that sense, but we do see disinflation continuing throughout 2026, potentially at a more accelerated rate if we have passed peak effect from tariffs. Yeah, I mean, so that that you know, that sounds all pretty reasonable.

I mean, maybe not, you know, we kind of started this thing out talking about how, you know, how how you guys are a bit cautious on the outlook, but doesn't seem unreasonable. You know, AI has been driving the economy. I think we all know that, you know, will will things will economic growth broaden out?

You know, that's that's a question. You know, you're the low hire, low fire environment, you know, persists. But that that takes that causes the unemployment rate to tick up in your in your view.

And it kind of sounds like the, you know, the inflation, you know, the disinflation process continues with tariffs, you know, kind of, you know, the tariff effect lagging. But, you know, things like owner's equivalent rent and other measures of housing ending up taking inflation lower. Is that is that a good summary, Agron?

Yeah, exactly. I think you really hit the nail on the head with most of that, and for that reason, we're a little bit more cautious than perhaps consensus surrounding 2026, especially in the later half. Yep.

Yeah, yeah. It all seems fair. OK, so, George, we've we've we've set the big picture, you know, Agron's given some of the fundamental underpinnings.

You know, what does this mean for the Fed? What does this mean for, you know, for rates, you know, and other financial markets? Sure.

And that kind of cautious tone does kind of play into our view that the Fed should lean into it. The question is, in terms of more cuts and more easing. The question is, it's hard to really get our arms around.

What is the reaction function when we're in the midst of also changing leadership at the Fed? And so 2026 is going to be interesting as a Fed watcher trying to understand the implications of the macro, which, if we're right on our outlook, does argue for more easing. At the same time, though, you have some concerns with current Fed governors and definitely Fed presidents about they've eased a lot already and they're still, you know, been above their inflation target for almost now five years running.

You know, I think it's going on close to 60 months or something like that's one of the longest on record. You can see that in our outlook report as well. But we think, you know, this is going to be slightly different from last year.

The last year we were basically on average expecting the Fed to cut three or four more times and they cut three times. We have basically the same sort of a call for this year that they're going to get rates down towards neutral, maybe slightly under neutral, but for different reasons. One, if we're right on the unemployment rate and it keeps getting higher, it's going to be enough justification for the Fed to cut.

But then we have this kind of awkwardness around, you know, when there's this shift in leadership and will the next Fed chair really pound the table for even larger cuts and get us even under 3 percent on Fed funds. And so that's the part that's kind of the path and the sequence and timing of cuts for us remain unclear. But we think the total will end up being almost like last year's three cuts.

So that's our kind of base case. You've got three cuts penciled in for 2026? We have three to four.

Yeah. Three to four, OK. Yeah.

Four being depending on what kind of Fed chair, you know, who we get as a Fed chair. We can discuss that later in future episodes. But more kind of hinged on like how dovish could the Fed pivot again and why are they pivoting for the right reasons or not?

And so, you know, that's that's our base case in terms of rates, which is a little bit more than what's priced in. The market's around two and a half cuts. At current timing.

And the dots are only one, if I'm not mistaken. Yeah. And the dots are only one.

But as we've seen, you know, as we've seen in times past, the Fed has like one or two cuts and they end up delivering three and four. Like in both 2024 and 2025, they delivered more cuts than they got to the lowest level during those SEP forecasts. They still went beyond their lowest bar.

So I think that they're going to end up cutting more than just one cut. But beyond that, you know, the tricky part, as we all know, is looking at the rates markets. Markets are forward looking and have jumped in and priced in a lot of this.

And so, you know, given the two halves of the year, if the first half looks a little bit better and you get all this supply coming both from investment grade issuance from the Treasury market and slightly better growth data in the first half, then that could, you know, create an environment where you get one last sell off in rates, which we would view as a buying opportunity. The same thing is true for mortgages. Mortgages have probably tightened a little bit too far.

But if they were to come under some pressure, if rates were to back up here, we think mortgages are better. So our slogan is buy rates on dips and sell credit on rips. And I think that's going to be the case.

Two cents curve is going to go over 100 at some point this year. But later, once the Fed really starts to cut, I think, you know, we probably touched on most of the points. In the last part, I think it's important to emphasize and you touched on a little bit, John, is that valuations are never a timing metric, but they definitely give you warning signals and risk markets are pretty stretched.

It's been driving, again, the economy more so than the economy driving the markets. And so any sort of wobbles or a more significant drawdown in tightening the financial conditions can both throw out our script, but everyone else's, which are much more optimistic than we are. So if we get a more meaningful kind of correction that's lasting, again, not knowing what the cows may be other than things are stretched, you know, I think that could change the narrative very quickly.

So the caution also stems from the fact that, you know, stock markets, other financial assets are very highly valued, spreads are very tight, that, you know, something takes it off will impact the economy and markets. And that would then create even lower rates environments. Yeah, I mean, it sounds like the sort of environment where, you know, with especially with implied vol being pretty low, which are probably supposed to be long, some tail risk.

That's our protection against tail risk, I guess I should say. So so, you know, so we talked about Fed cuts. We talked about the move in the curve.

You know, we talked about buying mortgages on dips and selling credit on rips, which I love. What about the what about the out the curve? Like what are your what are your rates projections here?

You've got a couple of good charts that I have the benefit of looking at here with kind of your base case range and your role in your bear scenarios. But like, let's say 10 year rate as an example, where, you know, where are we now and where do you expect it to go? Yeah, if we're going to focus clearly on the benchmark 10 year, we think our base case is 375 to four and three eights.

Let's call it 4.4 to make things easy. So 3.7, 4.4 is kind of should be the range. So once you get if we were to see, again, animal spirits, better information, better data in the first half and rates were to go above 425, that's definitely a buy zone on 10 year.

And we could see us towards the end of the year start to make a move under 4 percent. Got it. So this kind of sounds like the 10 year stays pretty range bound.

And what drives the curve steeper is the Fed cutting three to four times. Exactly. OK, great.

George, great stuff. You know, for our listeners, if you have not seen George and the team's macro to markets outlook, again, entitled Smooth Sailing Ahead, question mark, you know, definitely check it out. And if you are still not receiving the team's strategy reports, do check out the MEFG research portal at WWW dot MEFG research dot com, where you can find all of your favorite MEFG research as well as to have it have it conveniently delivered directly to your inbox.

So, George, great stuff as always. Agron, great, great job. First time on.

I definitely think we should do this again. 100 percent. Thanks for hosting, John. Thank you, John.

It was a pleasure. Yeah, mine as well. And to our listeners, thank you for listening to the MEFG Global Markets podcast.

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