Global central banks will set the direction for global fixed income markets in 2016 at their monetary policy meetings in December. Meetings at the ECB (3 December), Bank of England (10 December), the Riksbank (15 December), FOMC (16 December), Norges Bank (17 December) and Bank of Japan (18 December) all have the capability of changing market expectations significantly regarding the 2016 outlook.
The first big event will be the ECB meeting on 3 December that has become increasingly interesting after ECB President Draghi was surprisingly dovish at the latest ECB meeting in October and said that the ECB is open to a whole menu of monetary policy instruments. We now expect the ECB to cut the deposit rate by 10bp and also to keep the door open for further rate cuts. Moreover, at the same time, we expect the ECB to extend its QE purchases until December 2016 and expand the monthly purchases to EUR75bn.
The recent comments and speeches from FOMC members tigether with the latest labour market report suggest a December hike. We look for four further hikes in 2016, in line with the median projection within the FOMC, i.e. five hikes in total from now until year-end 2016. This implies that the Fed Funds target range will be 1.25-1.50% at the end of next year. The market is pricing is fewer rate hikes and we still see a an upside for USD yields in 2016. The higher US yields are expected to spill over to EUR yields but mainly in the 10Y segment as the ECB is able to keep 2Y and 5Y on a tight leash.
In Scandinavia the central banks also set the direction and the Riksbank, Norges Bank and Danmarks Nationalbank might all feel the pressure from the expected step-up in ECB easing, as it might trigger an ECB QE induced currency inflow. The Riksbank is expected to cut rates to -0.45% in December, Norges Bank is on an easing bias gut given the step-up in fiscal spending and the weaker NOK it is likely to leave rates unchanged for now. In Denmark the deposit rate at -0.75% is at what we think the 'effective lower bound'. Hence, no rate changes expected for the time being in Denmark. If we see new inflow, the reaction will come through a step-up in FX intervention to safeguard the EUR/DKK peg.
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