Major central banks unlikely to adopt rate hikes, market rates could drop further in short to medium-term: Nordea Research

Major central banks are not expected to adopt any rate hikes in the near-term and market rates could drop further in the short to medium-term if negative equity view plays out as expected. There still exists a large risk of an earnings recession this year, according to the latest report from Nordea Research.

A troublesome Q4 in 2018 has so far turned into a much better Q1 2019 for global equities, likely driven by dovish central banks across the globe.

Furthermore, it will be difficult for central banks to turn around and provide cascades of liquidity to markets, as they did in 2016 - simply because the growing wage pressure makes such a decision much less obvious compared to 2016, the report added.

Hence, liquidity additions (compared to now) are not likely in 2019, which means that equities will not get a helping hand from that front.

The Fed stated slowing growth as a main reason for the change of view, but we believe the change had as much to do with the scare from sharply tighter financial conditions towards the end of last year. An early end to QT, at least partially, supports the perception of a dovish Fed, patiently awaiting better numbers, Nordea Research further noted.

Recession risks are looming according to the rates markets, though. On Friday, 10y Treasury yields fell below 3m T-bill’s for the first time since 2007 and, in turn, our yield curve model puts the next recession six months away.

Philadelphia Fed President Harker said: “If markets believe yield curve inversion is a recession indicator, it is.” Wise words from a central bank that too late grasped the markets’ perception of the importance of QT.