One of the most important events for the global fixed income market this autumn is the FOMC meeting later this week. We believe the greater uncertainty about global growth and the deflationary effects of the stronger USD and low commodity prices are likely to keep the Fed off the trigger at this meeting. However, given that the US unemployment rate has now fallen to the lowest level since April 2008 and is now at the long-term level or NAIRU, we still expect a so-called 'lift-off' at the December meeting.
We also continue to hold the view that the US hiking pace will be significantly faster than currently priced in by the market, as we look for an average of 100bp in hikes per year in 2016 and 2017.
However, we do not expect the market to price this scenario from day one and believe the Fed will probably also be eager to convince the market that it is in no hurry to hike rates. All in all, we continue to see some upside for US yields especially in the 2Y-5Y segment of the curve but we also expect 10Y yields to move higher. All in all, we see a flatter US curve 2Y10Y.
In our view, higher US yields will tend to push EUR yields higher but the effect will be felt primarily in the 10Y segment of the curve. The ECB is keeping shorter yields on a tight leash throughout the forecast horizon. However, we expect even the effect on the 10Y segment to be modest, especially as we now find it likely that the ECB will extend QE purchases beyond September 2016.
As currency continues to flow out of Denmark, we still expect Danmarks Nationalbank to hike rates twice in a 6M horizon taking the deposit rate to -0.55%. In Sweden, we expect a final rate cut before year-end. Finally, we expect Norges Bank to cut rates as a reaction to the fall in oil prices and oil investments.
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