Review
The beginning of the year has been characterised by less positive economic data - in particular in the US - and a short-lived bout of EM jitters. However, the outlook remains fairly positive with the recovery expected to broaden during 2014.
In Europe, focus is on very low and still falling inflation. Despite the recent lack of ECB action, the EUR money market remains primed for more easing and EUR rates have moved lower over the past month.
In the US, the Fed has largely been looking through the recent weakness in data and the tapering process remains on track. However, as many investors have been positioned for higher rates going into this year, the weaker data has been able to push rates lower.
International rates
The Fed will continue to taper the QE programme, but this is already built into the curve. Rates are likely to range trade for a while, before the ascent is resumed in coming quarters. We see most upside to forward rates in the 2-5Y segment.
The ECB is expected to ease again during the spring as we expect inflation to surprise on the downside. Short-end rates will be anchored by the ECB throughout most of the year, while we expect rates with longer tenors to rise gradually amid better data and higher US rates.
The Bank of England (BoE) is set to remain on hold but has moved back towards softer forward guidance. This implies that money market rates are less anchored than before. With growth remaining firm, rates are likely to move higher, leading to a flattening of the British swap curve.
Scandi rates
Over the coming months, there remains a high likelihood of an independent rate hike by Danmarks Nationalbank (DN). However, given the lack of need to intervene in January, a hike seems less imminent than before.
The Riksbank is expected to keep rates on hold for a prolonged period, which leaves the money market curve too steep. We expect flat-to-higher rates during 2014, with the bulk of the upside late in the year.
Norges Bank seems content with the current situation and we expect the policy rate to remain unchanged. Hence, we see room for higher market rates as the NOK money market is still pricing in some probability of a rate cut.
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