A new phase for monetary policy – But only in the US

The direction of global yields has shifted in recent weeks following significant declines towards the end of November. Improvement in key data across the US and the Eurozone has been crucial, while signals from the Federal Reserve indicate that monetary policy normalization is set to slow. Our view remains that the path to 'normal' rate levels will be shorter than the market anticipates, but many uncertainties—partly related to the political shift in the US—contribute to a wide range of outcomes. As for the Eurozone, we still assess that the economic weakness will trigger additional cuts from the ECB worth 25bp at every meeting until Q3 25. The hawkish shift from the Fed in December will not change this.

This is the last edition of Yield Outlook in 2024. The editorial team wishes our readers a Merry Christmas and a happy and prosperous New Year.

Federal Reserve has entered a ‘new phase for monetary policy’

The December Federal Reserve (Fed) meeting resulted, as expected, in a rate cut of 25bp. However, the signals clearly indicated that the normalization of monetary policy from here will proceed more gradually: ‘A new phase for monetary policy’. The shift was motivated by a higher estimate for core inflation in 2025-26, while the majority now see the inflation risk—partly due to Trump's political plans—as being on the upside. This assessment stands in stark contrast to the latest forecast from September, when the main concern in the monetary policy committee (FOMC) was the rapid softening of the US labour market. In our view, that uncertainty has not disappeared, even though data towards the end of the year have clearly improved. Following the hawkish signals from the Fed, we have adjusted our forecast towards a more gradual rate cutting profile, albeit with the same endpoint. Thus, we now expect quarterly cuts of 25bp until March 2026, when the Fed Funds rate will reach its terminal level of 3-3.25%. Previously, we expected this level to be reached in September 2025. Our rate forecast, however, remains significantly below the market's, which today only discounts rate cuts worth 30bp in total towards the end of 2025. In our view, this leaves market rates highly sensitive to softer growth and inflation data.

The hawks’ grip on ECB policy will loosen in 2025

At the ECB, the basis for economic thinking is somewhat different from that in the US. Growth in the Eurozone has been clearly weak in the second half of the year, and simultaneously, inflationary pressure across targets continues to fade. At the ECB meeting in December, this development was clearly reflected, in our view, in ECB President Lagarde's communication, which was softer on most points than before. Nonetheless, it is evident that parts of the governing council's optimism about the economic outlook and continued concern about inflation still have a significant voice in the ECB. The market had expected softer signals, and since the meeting, European and Danish interest rates across the curve have moved higher. Contributing to this movement have also been the slightly improved growth signals in the PMI figures for December, which do not change the fact that the European economy still appears very fragile after a long period of weak growth. This is evident in areas such as the labour market in larger economies like Germany, which in recent quarters has shown higher unemployment and fewer job postings.

Download The Full Yield Outlook