Review
US data has continued to be soft over the past month. However, interest rates have not moved in any significant way, as much of the weakness has been attributed to the bad weather. This view is also shared within the Fed, which has kept the tapering process on track.
In Europe, the data has been in line with our expectation of a gradual improvement in the recovery. The risk of deflation is still a key issue as confirmed in recent inflation data.
Contrary to our expectations, the ECB decided not to opt for more easing at the March meeting. In the market, this was interpreted as being hawkish and has pushed rates up slightly.
Since the ECB meeting, it has been communicated by the central bank that the forward guidance has indeed been strengthened and this has moderated the increase in rates somewhat.
International rates
We still see a case for further ECB easing in April given our low forecast for inflation, although the likelihood has decreased slightly. The easing measures could include rate cuts, but liquidity easing measures could also be announced. We expect EUR rates to move broadly sideways in coming months until we get further clarification about the ECB's course.
In the US, the current weaker data should keep the long end within the recent range for some time. Therefore, we do not expect a break higher before Q3 14, as the economy picks up in pace. The Fed is likely to stay on track with its tapering process as the medium-term outlook remains decent.
In the UK, we have increased forecasts in the short end of the curve end as we have moved closer to an expected first rate hike in the spring of 2015.
Scandi rates
We believe Danmarks Nationalbank will deliver an independent rate hike on the 3M horizon. This should be sufficient to stabilise the Danish krone, therefore we expect no further Danish rate hikes. Should the ECB cut further, the move will be tracked if the deposit rate goes negative, whereas a refi rate cut would not be tracked in all scenarios.
In Sweden, we believe the Riksbank will delay future rate hikes in its rate path and furthermore we even see some room for another rate cut down to 0.50%, although the latter is not our main scenario.
In Norway, we believe that the money market is fairly priced after a recent move up in rates. Norges Bank signals an unchanged rate at 1.5% until H1 15, after which it expects a rate hike. We see no reason for it to change its outlook.
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