Euro yields: Steeper curve expected on a 12M horizon

Analysts at Dankse Bank, expect a steeper EUR yield curve on a twelve-month horizon and the first rate hike from the European Central Bank to take place Q2 2019.

Key Quotes:

“Continued strong PMIs continue to point to the ongoing expansion in the euro area and we forecast growth of 2.0% in 2018 and 1.9% in 2019, with risks on the upside. However, inflation pressures remain subdued, with January headline inflation dipping to 1.2%. Core inflation remains around 1%. Supported by the closing output gap, we expect core inflation to stay marginally above 1% for most of 2018 but also not to accelerate much further from here without higher wage growth. In its latest forecast update, the ECB left its core inflation unchanged at 1.5%, slightly above our 1.4% expectation for core inflation next year. In light of the strong growth, the ECB’s Governing Council is becoming increasingly confident that inflation will eventually increase and meet the inflation objective. We expect the first ECB hike in Q2 next year and an end to the QE programme this year.”

“We continue to expect a steeper EUR yield curve on a 12M horizon. The ECB still maintains a relatively tight grip on the short end of the curve. However, this is not the case for the 10Y segment of the curve, which we expect to be pushed by higher US yields, the end of ECB QE from the ECB and pricing of rate hikes in 2019 and 2020. An expected higher term premium works in the same direction. We have a 12-month 1.2% forecast for 10Y Germany.”

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