Yield Forecast Update Monetary policy divergence intensifying

Transcription

1 Investment Research General Market Conditions 16 September 2014 Monetary policy divergence intensifying Review Quick links The trend for lower rates, which prevailed for most of the year, has come to an end in the US as data supports the notion of an improving outlook for the US economy. Meanwhile in Europe data continues to disappoint and the ECB is desperately attempting to ease monetary conditions to back up the fragile recovery. Besides pushing front end rates lower, the ECB measures still fail to boost expectations of higher future growth and inflation. Eurozone forecast US forecast UK forecast Denmark forecast Sweden forecast Norway forecast International rates Forecast table The Fed is still expected to hike in April With growth and inflation firming and markets expecting a relatively shallow hiking cycle, there is room for higher US rates. Policy rate outlook The ECB will not cut further, but the central bank is interested in a sizeable increase in the balance sheet, which, looking ahead implies a reasonable probability that a larger purchase programme involving sovereign bonds will be launched too. We see rather limited upside risks to EUR rates for the entire forecast horizon. Only for the very long-end segments are forecasts above forward markets. The forecasts for US rates are above forward markets on all segments of the curves. Consequently, we believe that the USD/EUR rate spread, despite record high levels, will widen a bit further. The UK will be the first big central bank to tighten monetary policy. A first hike is forecasted in January Rates will move higher in the coming months. Scandi rates We believe that Danmarks Nationalbank will make FX intervention purchases and lower the CD rate by 10bp to minus 0.15% within the coming three months. This should support a gradual tightening of swap spreads versus EUR. Country Spot +3m +6m +12m USD EUR GBP DKK SEK NOK year bond yield outlook Country Spot +3m +6m +12m USD GER GBP DKK SEK NOK After the 50bp July rate cut we expect no more support from the Riksbank unless the economic environment deteriorates significantly. We still do not expect any rate cuts in Norway, but a dovish stance by Norges Bank will limit upside for yields. Senior Analyst Lars Tranberg Rasmussen laras@danskebank.dk Analyst Anders Vestergård Fischer afis@danskebank.dk Important disclosures and certifications are contained from page 10 of this report.

2 Contents and contributors Eurozone... 3 Macro Analyst Pernille Bomholdt Nielsen perni@danskebank.dk Interest rates Senior Analyst Lars Tranberg Rasmussen laras@danskebank.dk Analyst Anders V. Fischer afis@danskebank.dk US... 4 Macro Chief Analyst Allan Von Mehren alvo@danskebank.dk Interest rates Senior Analyst Lars Tranberg Rasmussen laras@danskebank.dk Analyst Anders V. Fischer afis@danskebank.dk UK... 5 Macro & Interest rates Chief Analyst Arne Lohmann Rasmussen arr@danskebank.dk Denmark... 6 Macro Economist Jens Nærvig Pedersen jenpe@danskebank.dk Interest rates Senior Analyst Lars Tranberg Rasmussen laras@danskebank.dk Analyst Anders V. Fischer afis@danskebank.dk Sweden... 7 Macro & Interest rates Chief Analyst Michael Boström +46 (0) mbos@danskebank.com Senior Analyst Michael Grahn +46 (0) mika@danskebank.com Senior Analyst Marcus Söderberg +46 (0) marsd@danskebank.com Senior Analyst Carl Milton +46 (0) carmi@danskebank.com Norway... 8 Macro & Interest rates Chief Analyst Arne Lohmann Rasmussen arr@danskebank.dk Forecast table September

3 Eurozone forecast The euro area recovery has softened in 2014 with GDP being flat in Q2 q/q. Survey data points to more weakness in the short term, although we expect to see a technical rebound in Q3 due to more working days. We also see signs that export growth is picking up again after weakness in Q2 2014, which is likely to be related to weak growth in the US and China in Q1. Looking ahead, we expect business surveys and activity to stay soft in the short term but to gather some pace again towards the end of 2014, as stronger growth in the US and China and a weaker currency lift growth. Inflation has fallen sharply to 0.3% y/y, mainly driven by lower food inflation in recent months. Looking ahead, we look for inflation to rise gradually as food price inflation moves higher and core inflation bottoms out. Monetary policy and money markets The ECB has eased monetary policy considerably over the past months by cutting rates further into negative territory, launching a new long-term liquidity facility (TLTRO) and starting an asset purchase programme of ABS and covered bond assets. The ECB is interested in a sizeable increase in the balance sheet, which, looking ahead, implies a reasonable probability of a larger purchase programme involving sovereign bonds being launched too. We believe 3M Euribor fixings will decline a bit further but stay positive. Our forecasts for the money market fixings are slightly below that priced into the forward market. By cutting further into negative territory and by committing to a sizeable expansion to the balance sheet, the ECB has further anchored EUR rates across the curve. Hence, rates out to the five-year segment should remain stable for the forecast horizon. For the ten-year segment, further easing (QE) could push yields down a bit; however, we believe that higher US Treasury yields will mitigate this effect. Net-net, we therefore project a gradual increase in bund yields on a 12-month horizon. We expect tighter swap spreads in the 5-10Y segments, which implies that swap rates could decline a bit further. Only for the very long end do we see upside risks to rates in coming months. The key risk to these views would be if US rates were to move sharply higher during the latter part of EUR Spot +3m +6m +12m ECB M German government bonds 2-year year year Swaprates 2-year year year EUR swap curve 2.5 % bp Change,bp (rhs) 15-Aug Sep-14 3M Euribor 10Y EUR swap rates 3 16 September

4 US forecast US growth picked up to 4% in Q2 following the sharp weather-related drop in Q1. Activity indicators continue to be robust into Q3 with especially ISM composite roaring ahead to the highest level in almost 10 years. Employment indicators continue to improve, although payrolls have disappointed a bit in recent months. We expect US growth to moderate but to stay solid at 3-3.5% in H2 and Core inflation has picked up somewhat lately to around % from 1% in the beginning of the year but is showing signs of stabilisation at this level. Unemployment is expected to reach the Fed s long-term target of 5.4% during Q2 next year. Monetary policy and the money market With unemployment reaching the Fed s target already in Q2 next year, we believe the first hike will come in April However, the Fed will still see more slack in the labour market and we therefore expect the Fed to hike rates only gradually to 1% by end 2015 and 2.5% by end The US money market pricing is currently consistent with a later and shallower hiking cycle than we forecast. We therefore see room for a steeper US money market curve. Rates in the 2Y-5Y segments continue to inch higher alongside the improvements in US data. In the long-term the declining trend in rates appears to have come to a halt, removing some of the strong curve flattening pressure. Despite the recent rise in rates and despite ECB s easing bias, we believe there is upside for US rates across the curve as rate hikes are drawing closer. Furthermore, we expect long-end rates to see an independent lift. In summary, most of our US rate forecasts are above the forward levels currently prevailing in the market. USD Spot +3m +6m +12m FED M year year year year year year USD swap curve Government bonds Swap rates 3.5 % bp Change,bp (rhs) 15-Aug Sep-14 3M USD Libor rates 10Y USD swap rates 4 16 September

5 UK forecasts The UK economy expanded 0.8% q/q in Q2 led by services the largest part of the economy which grew 1% in Q2. Recently, some slowdown in the manufacturing sector has been seen, which has also been reflected in the business surveys, indicating some moderation in activity in the coming months. However, while the recent weakness in data implies that the downside to our growth forecasts of 3.1% y/y for 2014 has increased, the current level of PMIs remains high, pointing to ongoing growth. Thus, we expect the UK recovery to remain on track in H2. UK inflation came in at 1.6% in July compared with % in June. Monetary policy and the money market In its August inflation report, the Bank of England (BoE) highlighted that the amount of slack in the labour market remains substantial, equivalent to around 1% of GDP. The amount of slack remains an important factor in respect of timing the first rate hike and given the weak development in wage growth, the likelihood of a rate hike in 2014 has declined substantially. For that reason, we now see a hike in Q as the most likely scenario, with risks tilted towards a hike already in December. However, the BoE is clearly on a very different path for monetary policy versus the ECB. The market is 15pricing in the first hike for March We expect a move higher in GBP yields as we expect the market to move forward the timing of the first rate hike to early 2015 and as we see a more aggressive hiking cycle. Furthermore, we expect to see a spill-over effect from higher US rates especially in the 5Y and 10Y segments. Our forecast for both 2Y and 10Y yields are higher than assumed in the forward market and we expect GBP yields to widen versus EUR, especially on six- and 12- month horizons. GBP Spot +3m +6m +12m Base rate M Government bonds 2-year year year Swap rates 2-year year year GBP swap curve 3.5 % bp Change,bp (rhs) 15-Aug Sep-14 3M GBP Libor rates 10Y UK swap rates 5 16 September

6 Denmark forecast GDP disappointed by falling 0.3% in the second quarter. The primary reason was a 1.6% drop in exports, as the general economic slowdown in Europe apparently affected Denmark more strongly than many other countries. However, underlying growth in private consumption remained decent and if the European slowdown is only temporary as we expect, Denmark should be well poised for a return to growth. Indicators for the Q paint no clear picture at this point, though. Inflation has turned lower again as food prices have been dragged down by cheaper milk, as well as for more technical reasons. We see only modest increases in inflation in Monetary policy and money markets Danmarks Nationalbank (DN) tracked the ECB rate cut in September and lowered the rate of interest on certificates of deposits (CD rate) by 10bp to minus 0.05%. The lending rate and the current account rate were both left unchanged at 0.20% and 0.00%, which marks the effective lower bound for these two policy rates. Since late August EUR/DKK has dropped into DN intervention zone. Since our intermediate forecast update, see FX Edge: DN to cap DKK appreciation with a 10bp rate cut in 3M, 2 September, the downward pressure on EUR/DKK has further intensified. We therefore stick to our forecast that DN will need to make FX intervention purchases and lower the CD rate by 10bp to minus 0.15% within the coming three months. A 10bp rate cut should be sufficient to cap the EUR/DKK downside and we thus expect DN to leave the CD rate unchanged on the 3-12M horizon. Swap spreads versus EUR have narrowed somewhat but mostly in the short end. The narrowing has happened from wide levels and we see a decent chance of further narrowing in the coming months. An independent Danish rate cut will be supportive for further spread narrowing, as the Cibor-Euribor fixing spread is expected to decline. Consequently, the forecasts for Danish rates are below forwards for all maturities up to 10Y. Only for the very long end (30Y) we currently see upside risks to interest rates. DKK Spot +3m +6m +12m REPO M year year year year year year DKK swap curve Government bonds Swap rates 2.5 % bp Change,bp (rhs) 15-Aug Sep-14 3M Cibor Rates 10Y DKK swap rates 6 16 September

7 Sweden forecast Swedish data has generally disappointed over the past couple of months, causing a setback for the economic outlook. We now expect only 2% growth in both 2014 and As before, declining net exports remain a drag on growth. This situation is likely to prevail as long as the euro area recovery fails to gain traction. For 2015, we see a heightened risk that higher taxes in combination with measures to contain mortgage credit expansion will moderate private spending. The long-term inflation outlook remains subdued well below the Riksbank s target as wage growth remains too weak. That said, the SEK is slowly adding a cyclical upward pressure and we expect August to mark a bottom ahead of a marked rise throughout the autumn and well into next year. Monetary policy and the money market After the 50bp rate cut in July, we expect no more support from the Riksbank. The inflation rate is set to pick up during the autumn and has so far been in line or slightly above the Riksbank forecast. Also, as the Riksbank remains concerned about the housing market, we think the economic environment needs to deteriorate significantly before any further stimulus can be expected. We expect a first rate hike somewhere in mid The FRA curve is already historically very flat and we expect money market rates to be well anchored going forward. Given the low volatility in the 2Y point, the curve steepness in 2Y-10Y is largely determined by the 10Y level. We see some more downside in long rates as the hunt for yield is still intense. Our favourite position on the yield curve is 5Y-10Y flatteners, as it might provide some protection if the inflation rate picks up. SEK Spot +3m +6m +12m Repo M Government bonds 2-year year year Swap rates 2-year year year SEK swap curve 3.0 % bp Change,bp (rhs) 15/08/ /09/2014 3M Stibor rates 10Y SEK swap rates 7 16 September

8 Norway forecast The Norwegian growth outlook improved broadly over the summer. Retail sales rose an impressive 1.2% m/m in June and the LFS unemployment rate dropped to 3.3% in Q2. Together with continued growth in employment and manufacturing production over the quarter it resulted in a strong growth rate at 1.2% q/q, well above the Norges Bank forecast of 0.45% q/q. The housing market has also continued to improve and prices rose for a seventh consecutive month in July. Finally, core inflation remained above the Norges Bank forecast in August rising 2.3% y/y, which was well above the Norges Bank forecast of 2.1%. Monetary policy and the money market Norges Bank struck a surprisingly dovish tone at the June monetary policy meeting, lowering the rate path and saying that the policy rate could be lowered if a further weakening of the outlook for the Norwegian economy was seen. However, given the improvement in Norwegian numbers seen over the summer, we are confident that Norges Bank will not lower its policy rate over the next 12 months. However, we do look for a small downward revision of the rate path at the September monetary policy meeting reflecting the significant drop seen in global rates and the first rate hike could be postponed to well into But that said domestic factors are still positive. Nibor fixings have fallen over the summer, as the liquidity situation has improved. We expect 3M and 6M fixings to stay around the current level for 12 months. The Norwegian swap curve 2s10s has continued to flatten this year from around 145bp at the beginning of the year to close to 90bp currently though it has recently steepened marginally. The dovish rhetoric from Norges Bank and the ECB/Riksbank rate cuts in June pushed down the short end but the rally in global long yields pushed the long end down even more. We continue to expect a further albeit modest flattening of the curve given our view that Norges Bank is done cutting and our view that the long end of the Norwegian curve will slightly outperform against the EUR curve. At an outright level our two-year swap forecast is above the market but we also expect long rates to rise more than currently priced into the forward market. It is primarily higher USD and GBP rates that we expect to push up the long end. NOK Spot +3m +6m +12m ON DEP M year year year year year year NOK swap curve Government bonds Swap rates 3.5 % bp Change,bp (rhs) 15/08/ /09/2014 3M Nibor rates 10Y NOK swap rates 8 16 September

9 NOK SEK DKK GBP EUR * USD Forecast table Forecast table w Horizon Policy rate 3m xibor 2-yr swap 5-yr swap 10-yr swap 2-yr gov 5-yr gov 10-yr gov Spot m m m Spot m m m Spot m m m Spot m m m Spot m m m Spot m m m Note: * German government bonds are used, EUR swap rates are used 9 16 September

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