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Fed expectations: Market is priced too soft for rates in 2016 – Danske Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 22, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Danske Bank, are sticking to their view that the Fed will hike three times in 2016 and four times in 2017, i.e. a total of seven hikes until year-end 2017.

    Key Quotes

    “As the distribution of 2016 dots show, there is a fine balance between members expecting three and four hikes in 2016. As we assess that the 'centre' for the voting FOMC members will retain a dovish-to-neutral view, we maintain our view of the next expected hike taking place in April (i.e. three meetings from now).”

    “In light of this, we find the current market pricing too soft. June’s FOMC is around 58bp and is thus 25bp above the expected Fed Funds rate starting from tomorrow, followed by 85bp priced in for December’s FOMC. This leaves only two full hikes priced in for 2016 and an additional two are priced in for 2017.”

    “Although the coming month’s market rate outlook is likely to be characterised by range trading on the back of soft US data and the Fed speakers not wanting to rock the boat too much, we should expect US yields to continue trending higher, most significantly at the shorter end of the curve. Therefore, our forecasts for US rates remain above the forward market but we see the most of the increase happening in the spring of 2016.”

    “A potential spill-over to euro fixed income should be dominant in longer segments with the easy ECB policy having a firm grip on the front and belly of the curve (out to 5Y area). In our view, the spill over from the US will be felt mainly in the 10Y segment as the ECB keeps 2Y and 5Y yields in check with QE purchases and a deposit rate at -0.3%. Looking six and 12 months ahead, the spill over from US yields should result in a slight upward pressure and we expect a steepening of the EUR curve driven from higher 10y yields.”
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