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Global central banks continue to set the direction for global fixed income markets. The big unknown is still if, and when, the Fed will initiate its long-awaited hiking cycle after the Fed funds rate has been at 0.25% since the financial crisis. Economists have previously called for a start of the hiking cycle in December 2015.
However,the slowdown in US jobs growth, the continued lack of wage inflation and emerging market concerns are likely to keep the Fed off the trigger a while longer and economists expect the first Fed Funds rate hike in January next year when the unemployment rate to be even lower than it is today. However, given the global uncertainty, there is a clear risk the Fed will wait until the March FOMC meeting.
"We expect the Fed to hike rates three times next year (75bp), well above market expectations. we see upside for US yields for the next 12 months but as the Fed will probably do its utmost to convince the market that it is not about to engage in aggressive tightening and as the ECB and Bank of Japan continue to ease, we expect the move higher to be subdued", says Danske Bank.
In Europe, all attention is on the ECB, where the pressure for further easing is building. Inflation turned negative in September and Euro area GDP growth is set to weaken on the back of the slowdown in China and other emerging markets. Hence, we expect that in December or Q1 the ECB will extend its QE purchases beyond 2016 and continue with a clear easing bias. However, economists expect neither an expansion of the monthly QE purchases nor a new cut in the repo rate, as the market has started to price over the last month.
"We expect ECB easing and global growth concerns to be able to drag 10Y bund yields towards 0.5% over the next three months. In 2016, we expect higher US yields to push EUR yields higher once again. The effect will be felt mainly in the 10Y segment of the curve, as the ECB is keeping 2Y and 5Y yields on a tight leash throughout the forecast horizon.As currency continues to flow out of Denmark, we still expect Danmarks Nationalbank to hike rates twice on a 6M horizon, taking the deposit rate to -0.55%",added Danske Bank.
