Yield Forecast Update Low inflation continues to keep rates down

Transcription

1 Investment Research General Market Conditions 15 April 2014 Low inflation continues to keep rates down Review Interest rates have moved sideways over the past month as the outlook is unchanged. The ECB has a clear easing bias but so far only delivered verbal intervention in The Fed is not happy about the perception that policies are now less accommodative. International rates Inflation is set to undershoot ECB expectations and lead to additional easing and more rate cuts are on the cards. Quick links Eurozone forecast US forecast UK forecast Denmark forecast Sweden forecast Norway forecast Furthermore, it seems increasingly likely that the ECB will do a form of quantitative easing through the private debt markets. Forecast table We expect the Fed to be broadly on autopilot, continuing to taper by USD10bn until Q4 14 when the QE programme will be phased out completely. We expect global rates to move sideways until there is further clarification of the ECB s course and until US data turns better. There is potential for higher rates mainly at the long-end of the curves towards the end of the year. Scandi rates In Denmark we no longer expect any independent rate hikes in the forecast horizon. This means that the certificate of deposit rate will remain negative for the next year. In Sweden we expect a July rate cut and postpone the expected first hike to Q3 15. Norges Bank to stay on hold for the next year and the market is already priced for this. Policy rate outlook 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 Editors: Senior Analyst Peter Possing Andersen pa@danskebank.dk 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 Senior Analyst Peter Possing Andersen pa@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 Senior Analyst Peter Possing Andersen pa@danskebank.dk Analyst Anders V. Fischer afis@danskebank.dk UK... 5 Macro & Interest rates Analyst Anders V. Fischer afis@danskebank.dk Denmark... 6 Macro Economist Jens Nærvig Pedersen jenpe@danskebank.dk Interest rates Senior Analyst Lars Tranberg Rasmussen laras@danskebank.dk Senior Analyst Peter Possing Andersen pa@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 Strategist Bernt Chr. Brun bbru@danskebank.com Forecast table April

3 Eurozone forecast The euro recovery has continued to gain strength and is currently tracking -2% annualised q/q growth. We look for the recovery to continue at this pace over the next year with some upside risk. Growth has so far mostly been domestically driven as consumption and investment has picked up somewhat. Rising real wages, less uncertainty, falling unemployment and pent-up demand are the main drivers behind the recovery. Inflation hit 0.5% in March. We expect it was the bottom but that inflation will stay below 1% for the rest of the year and undershoot the ECB s inflation expectations. Monetary policy and money markets The ECB has so far refrained from easing policy further since they cut rates in November last year. However, the ECB has a very clear easing bias and we expect the balance to tip towards further easing as we look for inflation to undershoot ECB expectations. It seems increasingly likely that the ECB will do a form of quantitative easing through the private ABS market but we also believe it will use the last bit of standard tool it has left and cut the refi rate by 10bp to 15bp. A negative deposit rate is also still on the table although it is not our main scenario. The 3M Euribor fixing is forecast to fall to 0.3% and then stay flat the next year. The Euribor fixing is only likely to move much lower if the ECB cuts the deposit rate. EUR rates are in the low end of recent ranges, driven by declining headline inflation and falling inflation expectations. We expect inflation to be troughing now and we expect the ECB to move to lift inflation expectations. This should create a floor for further downside for EUR rates. On the other hand, the inflation picture is not likely to change immediately and is likely to stay low for the rest of the year. This will cap upside for rates in coming months. The forecasts for 5Y and 10Y rates are thus flat on 3-6M horizons, which is broadly in line with the forward markets. On a 12M horizon, we expect some steepening of the curve, driven by the long end of the curve. Hence, the forecasts for the 10Y segment are above the forward markets on that horizon. EUR Spot +3m +6m +12m ECB M year year year year year year EUR swap curve German government bonds Swaprates 3.0 % bp Change,bp (rhs) 17-Mar Apr-14 3M Euribor 10-year EUR swap rates 3 15 April

4 US forecast The US economy slowed sharply in early 2014 on the back of adverse weather conditions. However, growth is expected to rebound in Q3. Overall we look for growth to average % in H1 rising to 3.0% in H2. Apart from adverse weather, high inventories and lingering effects from the rise in mortgage rates last year are dampening growth in the first part of However, as these effects fade, activity is expected to pick up again on the back of strong wealth gains, rising real wages, decent job growth and less fiscal drag. Unemployment is projected to decline from the current level of 6.7% towards 6.25% at the end of Inflation is currently 0.9% but is expected to increase gradually in coming quarters. Monetary policy and the money market The Fed is expected to be broadly on autopilot continuing to taper by USD10bn until October when the QE programme will be phased out completely. We look for the first rate hike in June 2015, and we expect the Fed Funds to be above 2% by end This is somewhat more aggressive than the current market pricing both in terms of timing and pace. As such, this leaves some room for upside relative to our expectation for 2yr rates but typically the market will have a hard time to price such an aggressive path fully so far ahead of the initiation of the hiking cycle. Two-year and five-year rates have increased a bit over the past month as Fed members marked up their projection of the Fed fund rates in 2015 and Generally, we believe that the curve will move little in the coming months, as a weather-related rebound in the economic data is probably already reflected in the market and we see some signs that the underlying economy remains weaker than expected. As we move forward towards year-end, a reacceleration in growth and signs of increasing inflation are likely to begin pushing forward hike expectations. Consequently, rates will start to move higher and the curve flattening trend will resume. The forecast is generally close to the forward market. USD Spot +3m +6m +12m FED M year year year year year year USD swap curve Government bonds Swap rates 4.0 % bp Change,bp (rhs) 17-Mar Apr-14 3M USD Libor rates 10-year USD swap rates 4 15 April

5 UK forecasts The third release of the Q4 GDP confirmed a sustained recovery driven by investment and net trade. Furthermore, the positive outcome for retail sales in February as well as the improved GfK consumer confidence in March provide support to household consumption in the following months. All PMI surveys for Q1 14 point to strong activity in the quarter, despite a slight slowing in the pace of expansion compared with Q4 13. Although we expect the recovery to be sustained, imbalances in the public budget and weak growth in real disposable income pose a substantial headwind for consumer spending and relatively modest prospects for export growth suggest that the activity expansion will be more moderate in coming quarters. We expect GDP to grow 0.8% q/q in Q1 and to slow in coming quarters resulting in growth of 2.8% y/y in 2014 and 2.3% y/y in CPI inflation is currently at 1.9% y/y and we expect it to remain close to this level on the forecast horizon. Monetary policy and the money market Not much has changed in the past months as the next phase of guidance from the February Inflation Report has been echoed in recent MPC members comments. By arguing that there is a lot of spare capacity and with inflation projected to be below target two to three years ahead, the MPC has signalled that the economy still needs a low-rate policy and that once the Bank Rate does begin to rise, hikes are likely to be gradual and limited compared with pre-crisis hiking cycles. We expect the first rate hike in the spring of 2015 in expectation of macro data continuing to be consistent with an above-average pace of expansion gradually removing economic slack in the economy. This is evident in our 12M forecast where we have now included a 25bp increase in the Bank Rate. We have only made small adjustments to our forecasts compared to last month. Hence, we expect only small changes in the 5Y and 10Y sector on a 3-6 month horizon from the current level. In the short end of the curve, however, rates should rise as we are approaching the first increases in the Bank of England policy rate in the spring of Hence, we are expecting the GBP curve to flatten as increases for shorter tenors will outdo those for longer tenors. Our forecasts are close to the forward market on a 3M horizon for all tenors and slightly above on a 12M horizon, as our expectations for the rate hiking cycle are a bit more aggressive than what is priced in the market. GBP Spot +3m +6m +12m Base rate M year year year year year year GBP swap curve Government bonds Swap rates 3.5 % bp Change,bp (rhs) 17-Mar Apr-14 3M GBP Libor rates 10Y UK swap rates 5 15 April

6 Denmark forecast There are signs that economic activity picked up in the first quarter after disappointing in the last part of Exports and industrial production are picking up and business sentiment is mostly better, with construction boosted by the storms in Private consumption also seems to be growing again, albeit at a very moderate pace of perhaps 0.2% q/q a quarter when stripped of the purely technical impact that storm insurance payments have had on official consumption figures. Inflation has surprised to the downside mostly because food prices have dropped but that effect seems to be turning now as world market food prices are going up. Monetary policy and money markets Danmarks Nationalbank (DN) did not intervene in March 2014 to support the DKK. The lack of intervention should be seen against the background of the DKK trading at the lowest level against the EUR in more than eight years. This is an indication that DN might not be that uncomfortable with a weak DKK and hence the risk of an independent rate hike has declined significantly. In combination with the ongoing strengthening of the Danish current account position and the ECB remaining on easing bias we now see very few arguments for DN to deliver rate hikes on the forecast horizon. We therefore no longer expect any independent Danish rate hikes in the next 12 months, which means that the certificate of deposit rate will remain slightly negative. If the ECB lowers its policy rates, then DN is only likely to track this move if the ECB deposit rate is lowered. We have lowered the forecast for the Cibor fixings 5bp across the forecast horizon to take into account the forecast for the policy rates. The forecasts are significantly below the forward markets. DKK swap rates have continued to track EUR swap rates. Overall we expect the spreads versus EUR rates to remain broadly stable with few risks for any widening in the near term. We believe the market is discounting far too many independent rate hikes from DN over the forecast horizon, hence the money market curve is too steep. The forecast for 2Y rates is therefore below the forward markets. The forecasts for the 10Y segment are above forwards on 6M and 12M horizon. DKK Spot +3m +6m +12m DKK swap curve REPO M Government bonds 2-year year year Swap rates 2-year year year % bp Change,bp (rhs) 17-Mar Apr M Cibor Rates 10-year DKK swap rates 6 15 April

7 Sweden forecast The focal point of Swedish economic discussions is on inflation developments. Although the final quarter of 2013 turned out very strong (showing 1.7% q/q, 3.1% y/y growth) inflation rates are increasingly suggesting Sweden is very close to deflation. March headline CPI and core CPIF printed -0.6% y/y and 0.0% y/y respectively, and the latter is now touching the record lows of One specific feature is that depending on the measure services prices are actually in or very close to deflation. The worrying aspect this time is that contrary to previous (rare) episodes, wage cost growth is record low and likely to remain so for an extended period of time. As wage costs are the most important driver of services inflation, this suggests that there is a never seen before risk for what we would call mild deflation. Monetary policy and the money market The Riksbank s April monetary policy update clearly expressed readiness to cut the repo rate by 25 bp at the July meeting to 0.5%. After the release of the March inflation figures, the pressure on Riksbank has mounted even further. Over the past two years, i.e. over the past 13 monetary policy meetings, the Riksbank has on average forecast CPIF inflation to print % after five quarters at which it starts hiking the repo rate. This is in essence the same rule as the one stated by Vice Goveror Jansson (perceived as a hawk who has explicitly stated that he will not vote for a rate hike unless actual inflation has risen above %). In our view, however, Riksbank needs to get more aggressive, arguing that rates have to stay lower for longer, to have a chance to revive inflation. Since we still expect inflation to undershoot the Riksbank s forecast by a wide margin, we expect both a July rate cut and a push forward of the hiking point to Q3 15. That said, there is surely a risk that these steps will prove insufficient to turn inflation on an upward path to the 2% target level. Amid a repricing of the Riksbank we expect 5Y yields to decline the most. The Swedish yield curve experiences a hump, especially relative to the European swap curve. Gradually, as the Riksbank needs to address the inflation and prevent inflation expectations from moving lower, we expect that hump to disappear, or at least decrease. Expect 2s5s to flatten and 5s10s to steepen on a 3-6m horizon. 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) 17/03/ /04/2014 3M Stibor rates 10-year SEK swap rates 7 15 April

8 Norway forecast The economic growth pace in Norway continues at a moderate pace at around 2% y/y. Since our previous update, hard data has come in close to but slightly above expectations. Retail sales for February came in at 0.6% m/m versus an expectation of 0.3% m/m, credit growth came in at 5.8% y/y versus an expectation of 5.6% y/y, manufacturing PMI for March was 51.9 (versus 5 expected) and unemployment has come in better than expected. The latest inflation number was also a bit higher than expected above the inflation target (2.6% y/y). Although house prices had been declining since mid-2013, we have now had three consecutive months with house price increases. After a series of disappointments in 2013, we see early signs that the Norwegian economy may have bottomed out. It is still too early to make a definite judgment, as the data releases are few and surveys have in general been weak. However, economic momentum appears better that half a year ago and we are cautiously optimistic. Monetary policy and the money market Norges Bank did not deliver any new signals in its latest Monetary Policy Report released on 27 March, reiterating that rates will remain at % until mid-2015, at which point a rate hike should be expected. In our view, Norges Bank is likely to stay on this path and the rates market is in line with this. This means that we currently view the rate market as fairly priced for the next couple of years. Looking at the Norwegian economy in its own right, disregarding international influences, we think that a normal interest rate would be appropriate, as the economy is operating close to its capacity and inflation is close to target. Currently, rates are held down by low rates internationally. As long-end US rates are likely to increase in the coming year, whereas European rates are likely to move much less, we expect the forces that hold Norwegian rates down to gradually weaken. An expected increased in the supply of high quality long Norwegian bonds will be another upwards force on Norwegian long rates. The current government is planning to spend considerable amounts on infrastructure projects (primarily roads and railroads). This is likely to be financed through AAA bonds, either through government bond issuance or through government-backed bonds. Hence, the Norwegian yield curve is, in our view, likely to steepen more than is currently priced in by the market. NOK Spot +3m +6m +12m ON DEP M year year year year year year NOK swap curve Government bonds Swap rates 4.0 % bp Change,bp (rhs) 17/03/ /04/ April

9 NOK SEK DKK CHF JPY GBP EUR * USD 3M Nibor rates 10-year NOK swap rates Forecast table Forecast table 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 Spot m m m Spot m m m Note: * German government bonds are used, EUR swap rates are used 9 15 April

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