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Investment Research — General Market Conditions
Review
Core bonds yields have continued to slide in the long end of the curve and German
Bond yields have again hit new record lows amid a steep decline in oil prices.
European rates markets are now pricing in a scenario of secular stagnation, i.e. a
scenario where neither growth nor inflation will return in the next decade.
In the US, market expectations have moved towards the Fed postponing its hiking
cycle, as inflationary pressures are low and oil prices keep dropping.
International rates
Looking forward, we expect the ECB to expand its balance sheet significantly and,
next week, we expect it to announce purchases of government bonds.
If QE finally approaches a credible pace, then we should expect some gradual
steepening of the curve from the very long end. We do not expect 10Y EUR rates to
move lower on more QE, but the upside is also fairly limited in the coming quarters.
EUR rates sub 5Y still have downside potential and Euribor fixings should move even
closer towards zero as the ECB eventually boosts liquidity in the euro system.
In the US, our forecasts are above the forward markets across the curve, as we expect
the Fed to start hiking in June this year. Due to significant curve flattening, we would
expect any upward moves in rates to lead to a parallel shift in the curve.
Scandi rates
Given the current level of EUR/DKK significantly below the central rate following
the move from the SNB and with the ECB expected to boost EUR liquidity, we still
see a case for further monetary easing in Denmark. We expect two Danish rate cuts on
a 12-month horizon.
In Sweden, our baseline scenario is that the Riksbank will keep the repo rate on hold
at zero throughout 2016, but more easing cannot fully be ruled out.
In Norway, the market is now pricing in more than two more rate cuts in 2015. We
believe this aggressive pricing will continue for the next six months, but eventually a
correction should be expected if rates are cut only once in 2015.
16 January 2015
Quick links
Eurozone forecast
US forecast
UK forecast
Denmark forecast
Sweden forecast
Norway forecast
Forecast table
Policy rate outlook
Source: Danske Bank Markets
10-year bond yield outlook
Source: Danske Bank Markets
Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]
Yield Forecast Update
Denmark to cut twice after SNB move and more QE from ECB
Country Spot +3m +6m +12m
USD 0.25 0.25 0.50 1.00
EUR 0.05 0.05 0.05 0.05
GBP 0.50 0.50 0.50 1.00
DKK 0.20 0.10 0.10 0.10
SEK 0.00 0.00 0.00 0.00
NOK 1.25 1.00 1.00 1.00
Country Spot +3m +6m +12m
USD 1.72 2.20 2.50 3.00
GER 0.45 0.60 0.65 0.80
GBP 1.47 1.75 1.90 2.30
DKK 0.66 0.88 0.91 1.04
SEK 0.76 0.65 0.70 0.80
NOK 1.39 1.35 1.55 1.85
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Contents and contributors
Eurozone ...................................................................................................................................................................................................................................................................... 3
Macro Analyst Pernille Bomholdt Nielsen +45 45 13 20 21 [email protected]
Interest rates Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]
US ...................................................................................................................................................................................................................................................................................... 4
Macro Senior Analyst Signe Roed-Frederiksen +45 45 12 82 29 [email protected]
Interest rates Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]
UK ...................................................................................................................................................................................................................................................................................... 5
Macro & Interest rates Senior Analyst Morten Helt +45 45 12 85 18 [email protected]
Denmark ....................................................................................................................................................................................................................................................................... 6
Macro Senior Economist Las Olsen +45 45 12 85 46 [email protected]
Interest rates Senior Analyst Jens Nærvig Pedersen +45 45 12 80 61 [email protected]
Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]
Sweden .......................................................................................................................................................................................................................................................................... 7
Macro & Interest rates Chief Analyst Michael Boström +46 (0)8-568 805 87 [email protected]
Senior Analyst Michael Grahn +46 (0)8-568 807 00 [email protected]
Senior Analyst Marcus Söderberg +46 (0)8-568 805 64 [email protected]
Senior Analyst Carl Milton +46 (0)8-568 805 98 [email protected]
Norway .......................................................................................................................................................................................................................................................................... 8
Macro & Interest rates Chief Analyst Arne Lohmann Rasmussen +45 45 12 85 32 [email protected]
Forecast table .......................................................................................................................................................................................................................................................... 9
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Eurozone forecast
Growth and inflation
We expect the euro recovery to gain strength in 2015, as a number of headwinds are fading.
First of all, the drop in the oil price will boost private consumption through higher real wage
growth and exports are supported by the currency depreciation. Business surveys improved
at the end of 2014, suggesting investments should bottom as geopolitical uncertainty has
faded. However, there is a risk that the Greek election fuels renewed uncertainty and results
in postponed business investments. The euro area was in deflation in December for the first
time since the financial crisis in 2009. We expect negative inflation during most of 2015, as
the sharp decline in the oil price will have a large negative impact. Core inflation is also low
and close to its historical low of 0.7%.
Monetary policy and money markets
The ECB is under pressure to ease again, as the euro area is in deflation and as the current
easing measures are insufficient to expand the balance sheet sufficiently. Based on this we
expect the ECB to announce government bond purchases at the upcoming meeting on 22
January. This should follow as there is a risk of de-anchored inflation expectations, even
though the oil price decline supports the recovery. There is still downside for money market
fixings, as excess liquidity gets a boost. We expect 3M Euribor to decline to around zero and
6M Euribor to around 10bp and stay there for at least three years. Hence EUR rates sub 5Y
should inch lower.
Yield curve
The flattening of the EUR swap curve has continued and even intensified in recent months,
as the market is pricing in secular stagnation in Europe. We believe the move lower in the
long-end rates is a bit overdone by now and we do not forecast 10Y rates going lower from
here. However, they are probably not going to increase much either, as the ECB will embark
on QE and inflation is likely to remain negative for most of 2015.
3M Euribor 10Y EUR swap rates
Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets
Forecast summary
Source: Danske Bank Markets
EUR swap curve
Source: Danske Bank Markets
EUR Spot +3m +6m +12m
ECB 0.05 0.05 0.05 0.05
3M 0.06 -0.02 -0.02 -0.02
2-year -0.16 -0.10 -0.10 -0.10
5-year -0.05 -0.05 0.00 0.15
10-year 0.45 0.60 0.65 0.80
2-year 0.13 0.15 0.15 0.15
5-year 0.29 0.25 0.25 0.40
10-year 0.71 0.80 0.85 1.00
Money market
German government bonds
Swaprates
-30
-25
-20
-15
-10
-5
0
0.0
0.5
1.0
1.5
2.0
0 3 6 9 12 15 18 21 24 27
Change,bp (rhs) 15-Dec-14 15-Jan-15
% bp
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US forecast
Growth and inflation
US GDP grew a whopping 5% q/q annualised in Q3 14, boosted by strong private
consumption and business investments. Although we expect the pace of growth to moderate
from this level, we remain positive on the outlook for the US economy this year. The drop in
oil prices is giving a substantial boost to real spending power for the US consumer and
incomes are further supported by improvement in the labour market. With continued low
interest rates, held down by global monetary easing, the backdrop for both residential and
non-residential investment is favourable and we look for growth to remain above trend
throughout this year.
Monetary policy and the money market
At the December FOMC meeting, Chairman Yellen strongly suggested that the Fed would
not hike rates at the next two FOMC meetings (January and March). Apart from this, the
tone of the press conference was more hawkish than expected and the key takeaway is that
rate decisions will be data dependent. If we are right in our economic forecast for the
coming six months, the unemployment rate should reach 5.5% by June, which is close to the
FOMC’s projection of the long-term natural level. At this time, we expect the FOMC to be
confident enough in the recovery to hike the Fed funds rate by 25bp. This will mark the start
of the hiking cycle and we look for further two rate hikes this year. On the back of this
expectation, we expect a significant increase in 3M USD Libor fixings over the coming
year. The forecast for the fixing is well above forwards.
Yield curve
Recently, we advocated that US rates would move higher, mainly in the 2-5Y area on the
back of Fed rate hikes drawing closer and that the curve would flatten given the support to
the 10-year segment. While the curve flattening should continue as the Fed initiates a rate
hiking cycle this summer, we believe the recent move has happened too rapidly. Hence, if
rates rebound again in the coming months it is likely to cause a parallel upward shift of the
curve, i.e. there is a bit more upside to long-end rates now with ten-year Treasury yields
around 2%. The forecasts for US rates are above forwards on all maturities.
3M USD Libor rates 10Y USD swap rates
Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets
Forecast summary
Source: Danske Bank Markets
USD swap curve
Source: Danske Bank Markets
USD Spot +3m +6m +12m
FED 0.25 0.25 0.50 1.00
3M 0.25 0.46 0.74 1.32
2-year 0.43 0.90 1.20 1.80
5-year 1.18 1.90 2.20 2.70
10-year 1.72 2.20 2.50 3.00
2-year 0.71 1.10 1.40 2.00
5-year 1.44 2.05 2.35 2.85
10-year 1.95 2.35 2.65 3.15
Swap rates
Money market
Government bonds
-40-35-30-25-20-15-10-505
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0 3 6 9 12 15 18 21 24 27
Change,bp (rhs) 15-Dec-14 15-Jan-15
% bp
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UK forecasts
Growth and inflation
The relatively downbeat figures on the UK economy over autumn 2014 in our view conceal
that a recovery is already unfolding in the UK; although PMIs have come off somewhat of
late, all remain in expansionary territory. Notably, we look for the UK to see a positive
spillover from a lower oil price and the eurozone rebound that we envisage for H2.
Inflation has declined rapidly in recent months to 0.5% y/y in December, the lowest rate
since May 2000. The deceleration in consumer prices is due primarily to lower oil prices and
we expect headline inflation to fall further in coming months. Given recent developments in
oil price, headline inflation could temporarily fall below zero in Q1.
Monetary policy and the money market
A subdued inflation outlook and a weaker global backdrop have made the Bank of England
(BoE) keen to tone down rate hike expectations. Notably, the MPC was quite dovish in its
November Inflation Report. Overall, the timing of the first rate hike remains conditional
entirely on incoming data but the recent soft stance from the BoE suggests it is much less
likely it will raise rates before H2 15. We still look for the first hike to arrive in Q3,
probably in connection with the August Inflation Report. UK yields have declined
substantially over the past month, reflecting weaker inflation and growth expectations.
However, we stress that low headline inflation is not in itself crucial in relation to the
MPC’s policy decision but rather it is the medium-term inflation outlook and wage growth
that matter. Hence, in our view, markets are pricing the BoE too dovishly, with the first hike
priced in for Q2 16.
Yield curve
In the light of the recent decline in interest rates, we have lowered our forecasts on the 5Y
and 10Y tenors. However, we still see potential for higher yields in 2015 and we have raised
our 6-12M forecast for 2Y rates as future BoE interest rate increases move closer. Hence,
we expect the UK yield curve to flatten further, with rates rising most in the 0-5Y segment.
Our forecasts are above forwards on all maturities and we still expect UK yields to widen
versus the EUR.
3M GBP Libor rates 10Y UK swap rates
Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets
Forecast summary
Source: Danske Bank Markets
GBP swap curve
Source: Danske Bank Markets
GBP Spot +3m +6m +12m
Base rate 0.50 0.50 0.50 1.00
3M 0.56 0.55 0.75 1.10
2-year 0.38 0.70 1.00 1.40
5-year 0.96 1.25 1.55 2.00
10-year 1.47 1.75 1.90 2.30
2-year 0.84 1.10 1.40 1.75
5-year 1.25 1.50 1.75 2.20
10-year 1.60 1.85 2.00 2.40
Swap rates
Money market
Government bonds
-40
-30
-20
-10
0
10
0.5
1.0
1.5
2.0
2.5
0 3 6 9 12 15 18 21 24 27
Change,bp (rhs) 15-Dec-14 15-Jan-15
% bp
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Denmark forecast
Growth and inflation
Growth in Q3 14 accelerated to 0.4% q/q and it looks as though there was decent growth in
Q4 as well. Employment is also picking up. We are becoming more confident that the
economy is getting better, driven by both foreign and domestic demand and helped by the
drop in oil prices. However, risks remain, not least from weak business confidence. Energy
is dragging inflation down and it will drop further in January, but should then turn around
and remain above inflation in the euro area.
Monetary policy and money markets
Against our expectations, Danmarks Nationalbank (DN) did not cut its interest rates ahead
of the New Year. Indeed, DN did not intervene in the FX markets in December to weaken
DKK even as EUR/DKK dropped below 7.435 for a short period – a level where we would
have thought an intervention would be made. Large tax payments have and are expected to
continue to weigh on liquidity in the DKK money market in the coming months.
Consequently, banks have significantly increased the loans on the one-week facility at the
central bank to counter the liquidity drain.
Given the current level of EUR/DKK significantly below the central rate following the
move from SNB and with the ECB expected to boost EUR liquidity, we still see a case for
further monetary easing in Denmark. However, we note that the easing may come in various
forms: 1) FX intervention purchases and a cut of the rate of interest certificates of deposits
(CD rate), 2) a cut of the lending rate, as banks have increased borrowing from the central
bank, 3) use of extraordinary lending facilities as announced on 16 December 2014 – link.
Given the current circumstances, we see the most likely outcome as a symmetric rate cut in
the CD and the lending rates by 10bp to minus 0.15% and +0.10% on a three-month time
horizon and an additional cut in the CD rate by 10bp to minus 0.25% on 12M horizon. We
expect 3M Cibor to edge down towards 0.10%.
Yield curve
Given the outlook for continued tight liquidity in Denmark in the coming months, this might
add a bit of upward pressure on DKK-EUR/interest rate spreads. However, the spreads are
already elevated so further widening should be limited. On a 6-12M horizon the spreads
should be able to narrow a bit. Overall, the forecasts for Danish rates are below forwards for
all maturities below 5Y and close to forwards for longer tenors.
3M Cibor Rates 10Y DKK swap rates
Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets
Forecast summary
Source: Danske Bank Markets
DKK swap curve
Source: Danske Bank Markets
DKK Spot +3m +6m +12m
REPO 0.20 0.10 0.10 0.10
3M 0.25 0.20 0.19 0.10
2-year -0.10 -0.02 -0.04 -0.04
5-year 0.07 0.05 0.10 0.25
10-year 0.66 0.88 0.91 1.04
2-year 0.38 0.35 0.35 0.35
5-year 0.58 0.55 0.50 0.6010-year 1.03 1.10 1.15 1.30
Swap rates
Money market
Government bonds
-25.0
-20.0
-15.0
-10.0
-5.0
0.0
5.0
0.0
0.5
1.0
1.5
2.0
0 3 6 9 12 15 18 21 24 27
Change,bp (rhs) 15-Dec-14 15-Jan-15
% bp
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Sweden forecast
Growth and inflation
Political turmoil has characterised Sweden for a while. A new election to be held in March
was announced in November, only to be withdrawn in December after an agreement
between the government and the alliance parties that basically ensures that the government’s
future budget will be passed. This means that some of the proposals for higher taxes that
were rejected in November might come back in a supplementary budget in April but all this
is subject to considerable uncertainty. Recent data have not changed the picture of the
Swedish economy in any meaningful way. It is a two speed performance where
manufacturing and exports show no signs of regaining momentum, while services producers
do much better. In an updated macro forecast, Danske Bank recently lowered the GDP
estimate for 2015 to 1.7% (previously 2.4%) due to sustained sluggishness in manufacturing
and exports. In Sweden gasoline prices have declined a lot as well, which is a positive factor
for consumers’ real income. Nonetheless, compared with previous several years’ reductions
in income taxes, the ‘gasoline effect’ should be limited.
Monetary policy and the money market
Our baseline scenario is that the Riksbank will keep the repo rate on hold at zero throughout
2016. The Riksbank board mentions the possibility to lower the repo rate below zero and/or
boosting the balance sheet by adding liquidity to the banking system. Outright FX
intervention is of course a tool that is available but the board seems unanimous in its stance
that such a measure is the last line of defence. The ongoing decline in the oil price could
once again push down inflation below the Riksbank’s current forecast but we do not think
that this will be enough to trigger unconventional policies at this stage.
Yield curve
One of our main themes last year was outperformance of the mid-segment (5-year) of the
yield curve, as a low-for-long monetary policy was gradually embedded in market
expectations. We expected that the ‘hunt-for-yield’ would make investors move further out
the curve towards the 5-year segment. Hunt-for-yield remains a driving force, the repo rate
has been slashed to zero and is expected to stay there for quite some time and 5-year yields
have come down significantly. The front-end is not likely to move anywhere unless
unconventional policies turn out to be a fact after all. Compared with the Euroswap curve,
the Swedish curve is steep between 5- and 10-years. We now think it is time for the 10s to
outperform.
3M Stibor rates 10Y SEK swap rates
Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets
Forecast summary
Source: Danske Bank Markets
SEK swap curve
Source: Danske Bank Markets
SEK Spot +3m +6m +12m
Repo 0.00 0.00 0.00 0.00
3M 0.21 0.25 0.25 0.30
2-year 0.00 -0.05 -0.05 -0.05
5-year 0.29 0.35 0.40 0.50
10-year 0.76 0.65 0.70 0.80
2-year 0.19 0.25 0.25 0.25
5-year 0.52 0.65 0.70 0.85
10-year 1.08 0.95 1.00 1.10
Swap rates
Money market
Government bonds
-35
-30
-25
-20
-15
-10
-5
0
0.0
0.5
1.0
1.5
2.0
2.5
0 3 6 9 12 15 18 21 24 27
Change,bp (rhs) 15/12/2014 15/01/2015
% bp
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Norway forecast
Growth and inflation
The sharp drop in the oil price is expected to result in a bigger drop in oil investments than
previously expected, which would pull down growth this year. However, we expect a much
weaker NOK to significantly soften the blow from the lower oil price and oil investments.
We believe unemployment will climb but that it will be limited by economic adaptation and
a flexible labour market. The big unknown is how the slide in the oil price will affect the
confidence of consumers, businesses, banks and other economic agents in Norway. We look
for mainland-GDP growth of 1.8% y/y in 2015 down from 2.6% in 2014.
Monetary policy and the money market
Norges Bank cut its policy rate by 25bp at its December meeting, indicating at the same
time a roughly 50/50 chance of a further cut before the summer. The cut was made as a
hedge against economic developments deteriorating significantly on the back of the slide in
the oil price. Therefore, it may appear that movements in the oil price will be the deciding
factor in whether Norges Bank lowers interest rates further and. The oil price is currently
down close to USD50/bbl, whereas Norges Bank based its projections on a USD70/bbl
price. This clearly points to the bank reducing its policy rate again as early as March. We
believe the market might price in two more rate cuts after the March meeting but our official
view – given our macroeconomic forecasts – is that the March cut will be the last rate cut in
this cycle, although risks are clearly skewed to the downside.
Yield curve
Norwegian swap rates have fallen dramatically since the December rate cut by Norges Bank
and the market is now pricing in more than two additional rate cuts in 2015. We believe this
aggressive pricing will continue for the next six months but eventually a correction should
be expected if rates are cut only once this year. 10y swaps have tightened versus EUR swaps
over the past six months. We believe this tightening will continue on a three- to six-month
horizon.
3M Nibor rates 10Y NOK swap rates
Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets
Forecast summary
Source: Danske Bank Markets
NOK swap curve
Source: Danske Bank Markets
NOK Spot +3m +6m +12m
ON DEP 1.25 1.00 1.00 1.00
3M 1.41 1.20 1.20 1.20
2-year 1.44 1.40 1.50 1.60
5-year 0.85 0.80 0.90 1.10
10-year 1.38 1.35 1.55 1.85
2-year 1.04 1.00 1.00 1.10
5-year 1.23 1.10 1.30 1.50
10-year 1.76 1.70 1.90 2.25
Swap rates
Money market
Government bonds
-20
-15
-10
-5
0
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
0 3 6 9 12 15 18 21 24 27
Change,bp (rhs) 15/12/2014 15/01/2015
% bp
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Forecast table
Forecast table
Source: Danske Bank Markets
Horizon Policy rate 3m xIbor 2-yr swap 5-yr swap 10-yr swap 2-yr gov 5-yr gov 10-yr gov
Spot 0.25 0.25 0.71 1.44 1.95 0.43 1.18 1.72
+3m 0.25 0.46 1.10 2.05 2.35 0.90 1.90 2.20
+6m 0.50 0.74 1.40 2.35 2.65 1.20 2.20 2.50
+12m 1.00 1.32 2.00 2.85 3.15 1.80 2.70 3.00
Spot 0.05 0.06 0.13 0.29 0.71 -0.16 -0.05 0.45
+3m 0.05 -0.02 0.15 0.25 0.80 -0.10 -0.05 0.60
+6m 0.05 -0.02 0.15 0.25 0.85 -0.10 0.00 0.65
+12m 0.05 -0.02 0.15 0.40 1.00 -0.10 0.15 0.80
Spot 0.50 0.56 0.84 1.25 1.60 0.38 0.96 1.47
+3m 0.50 0.55 1.10 1.50 1.85 0.70 1.25 1.75
+6m 0.50 0.75 1.40 1.75 2.00 1.00 1.55 1.90
+12m 1.00 1.10 1.75 2.20 2.40 1.40 2.00 2.30
Spot 0.20 0.25 0.38 0.58 1.03 -0.10 0.07 0.66
+3m 0.10 0.19 0.35 0.55 1.10 -0.02 0.05 0.88
+6m 0.10 0.18 0.35 0.50 1.15 -0.04 0.10 0.91
+12m 0.10 0.10 0.35 0.60 1.30 -0.04 0.25 1.04
Spot 0.00 0.21 0.19 0.52 1.08 0.00 0.29 0.76
+3m 0.00 0.25 0.25 0.65 0.95 -0.05 0.35 0.65
+6m 0.00 0.25 0.25 0.70 1.00 -0.05 0.40 0.70
+12m 0.00 0.30 0.25 0.85 1.10 -0.05 0.50 0.80
Spot 1.25 1.41 1.04 1.23 1.76 1.44 0.85 1.39
+3m 1.00 1.20 1.00 1.10 1.70 1.40 0.80 1.35
+6m 1.00 1.20 1.00 1.30 1.90 1.50 0.90 1.55
+12m 1.00 1.20 1.10 1.50 2.25 1.60 1.10 1.85
NO
KD
KK
SE
K
Note: * German government bonds are used, EUR swap rates are used
US
DE
UR
*G
BP
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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’).
The authors of the research report is Lars Tranberg Rasmussen (Senior Analyst).
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11 | 16 January 2015 www.danskeresearch.com
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Yield Forecast Update
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