Eurozone yields: risks are increasingly skewed to the upside - Danske Bank

Analysts from Danske Bank, expect that the European Central Bank (ECB) will continue its massive purchases but at a reduced rate. They see higher yields for the next year in the Eurozone. 

Key Quotes: 

“Over the past weeks, economic data releases have revealed strong growth in the euro area, a falling unemployment rate and a slightly higher core inflation rate. This should be exactly what the ECB was hoping for ahead of its QE decision coming up in autumn – but the stronger euro is the ‘party pooper’ and because of this we do not expect the ECB to sound too confident when talking about the economic recovery. The euro appreciation since the ECB’s forecast update could imply the ECB will lower its inflation projection for 2019 to 1.3%, which is below the 2% target.”

“While we still expect the ECB will continue its QE purchases – albeit at a reduced rate of EUR40bn per month in H1 18 – we now believe this will be announced at the October meeting (rather than our previous expectation of September) as the ECB communicated that it has not set a date for when it would discuss changes to the QE programme and that its staff has not been tasked to look into QE options after December 2017.”

“We continue to expect a steeper EUR yield curve for the 2Y10Y in 2018. The ECB maintains a 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 elevated by higher US yields and a market slowly pricing in an end to the QE programme/tapering in 2018.”