Yield outlook: Full steam ahead in the Eurozone

Over the past month, global swap rates have risen across the board. The uncertainty surrounding the federal government shutdown in the US contributed to another rate cut by the Federal Reserve (Fed) in October, but statements from several members of the monetary policy committee have cast doubt over the pace of future rate cuts. The more cautious tunes have also pushed long-end US rates higher, supported by higher real rates. On this side of the Atlantic, stronger-than-expected data on both growth and inflation have driven short-end Danish and European rates higher, with 2-year EUR swap rates rising by approximately 10bp over the past month.

Will we see more rate cuts from the Fed this year?

The US federal government has recently reopened after being shut down for over a month, marking the longest shutdown in the country's history. As a result of the federal shutdown, the release of key economic indicators, including inflation and labour market data, has been delayed. The coming weeks will therefore be crucial in determining the state of the US economy and whether this could trigger the next rate cut before year end. We expect the Fed to remain on hold in December, but investors are less certain, assigning a 30% probability to a rate cut. While we believe the weakening labour market justifies monetary policy easing, we emphasise that structural shifts in the labour market, caused by a significant slowdown in immigration, complicate the picture. The slower growth in the labour force means that a much smaller increase in employment is likely needed to generate inflation compared with recent years. Furthermore, we assess that markets are underestimating the risk of a resurgence in inflationary fears, as the US economy continues to benefit from expansionary fiscal policy and significantly more accommodative financial conditions. Overall, we expect further quarterly rate cuts of 0.25 percentage points until late summer 2026, which is less than the market currently anticipates.

Stronger-than-expected data in the Euro area

Recent economic indicators in the euro area have been broadly stronger than anticipated. Growth in the third quarter exceeded expectations, driven by continued strong demand, particularly in the southern European countries. October PMIs also showed signs of increased momentum, with improvements across countries and sectors, especially in the German services sector, which continued to expand for the second consecutive month. Inflation is close to target, but core inflation remains sluggish, supported by elevated wage growth. At its latest meeting in October, the monetary policy committee emphasised that the ECB remains "in a good place" and that several downside risks to growth have abated. We expect the deposit rate to remain at 2% until the end of 2026. In the short term, the risk for short-end European rates remains tilted towards one last rate cut, although the bar is high. European wage data continues to point to a significant decline over the coming quarters and combined with base effects set to bring inflation below target by spring, this - despite our baseline expectation - could pave the way for a more dovish stance from the ECB in early 2026.