Steeper yield curve awaits in the US
|Since our latest forecast, Danish and European rates have risen across the board. Better-than-expected economic growth, persistently high wage growth, and a more hawkish rhetoric from the ECB have pushed short-end Danish and European rates higher. In the long end, the outlook for a significant increase in government bond issuance, combined with the ongoing transition to a more market-rate-based system in the Dutch pension funds, has driven long-end rates upward. This has resulted in a notable steepening of the Danish and European swap curve. In the US, short-end rates have traded within a narrow range, while the long end has been pushed higher by an increase in term premiums.
US – A mixed bag
The data quality of US key economic indicators remains challenged, as many data collection processes were impacted by the federal government shutdown in the autumn. However, there are signs that the US labour market has begun to show more pronounced signs of weakness over the past few months, with the ratio of job openings to unemployed now at its lowest level since March 2021. Furthermore, productivity growth has increased, reducing inflationary pressure stemming from persistently high wage growth. The minutes from the Federal Reserve's December meeting also made it clear that the FOMC is increasingly attentive to labour market weaknesses. All in all, we expect two additional rate cuts of 0.25 percentage points in March and June 2026, which is broadly in line with market expectations. In the coming months, focus will shift to the appointment of a new Federal Reserve Chair and the increased political pressure from the Trump administration.
Positive momentum continues in the Euro area
Recent euro area key economic indicators have confirmed the more optimistic growth outlook for the region. The economy grew more than expected in 2025, supported by a consistently strong services sector, stable industry, and solid demand, particularly in the southern European countries. Inflation remains close to the target, although core inflation continues to show resilience due to elevated wage growth. This was also reflected in the ECB's latest December forecasts, which were revised upwards for both growth and inflation in the coming years. Additionally, some members of the Governing Council have stated that the next ECB rate adjustment could potentially be a hike.
Our base case assumes that the deposit rate will remain at 2% until the end of 2027. The primary downside risk to this outlook is a significant drop in inflation, driven by lower energy prices and base effects, which are expected to pull inflation below the target in the coming months. However, there is a non-negligible risk of a rate hike in 2027 if Germany's expansionary fiscal policy and increased European defence spending end up having a stronger-than-expected impact.
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