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Central banks at a crossroads for 2019 – Nordea Markets

According to analysts at Nordea Markets, virtually nothing is priced in for the Fed during 2019 by now, with the current market pricing being consistent with no rate hikes in 2019 from the Fed (and increasing risks of a rate cut in 2020).

Key Quotes

“2.75% was the benchmark to look for in the 10Y treasury yield if the market priced out all rate hikes in 2019. That benchmark has now almost been reached, as the 10Y treasury yield is trading just above 2.75%, while no hikes are priced in for 2019.”

“This also means that a probability of a rate cut probably needs to be priced in for 2019, before 10Y treasury yields can head lower than now. Even with the current turmoil in mind, that seems a little too stretched to think of already. The market is rather pricing in too little than too much, especially if the debt ceiling stand-off provides a bit of fresh air for risky assets as described above.”

“The same story applies to the ECB pricing. Markets now price in 2-2.5bp for 2019 as a whole. Both the ECB and the Fed pricing seem contingent on macro data turning a lot worse over the next quarters – a scenario that we don’t rule out.”

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