New research from Danske Bank Markets
In December, global central banks have been setting the direction for the global fixed income markets in 2016.
First out was the ECB and Mario Draghi on 3 December. However, he disappointed the aggressive market expectations by delivering a much less aggressive 'menu' of monetary easing measures. It indicates to us that the bar for more easing is quite high. Hence, we expect the December ECB easing marked the end of ECB easing.
However, 'end of easing' does not mean that we are in for significantly higher yields in 2016. The ECB is still keeping yields up to at least the five-year segment on a very tight leash. Hence, the upward move we expect for 10Y yields is due mainly to the spill-over effect of higher USD yields in 2016.
The next global event was the FOMC meeting on 16 December, when the board delivered the long-awaited 25bp hike and all focus turned to the so-called 'dots', that now signal four hikes in both 2016 and 2017. We believe the Fed will hike three times in 2016 and four times in 2017 and find the current market pricing too soft as only two full hikes are priced in for 2016. We expect US yields to continue trending higher in 2016, most significantly at the shorter end of the curve, and we expect a flattening of the curve 2Y10Y and 5Y10Y.
The less aggressive ECB easing took some pressure off the Scandinavian central banks and both the Riksbank and the Norges Bank held in December. However, our benign view on Swedish inflation is unchanged and we continue to see more easing from the Riksbank in 2016. However, in Norway, the central bank has, in our view, become too negative on the outlook and we forecast that 0.75% marks the bottom for Norwegian policy rates.
In Denmark, the currency outflow from Denmark has apparently accelerated since the ECB meeting and we now believe a small independent rate hike of 10bp is needed in Q1 to stabilise EUR/DKK.
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