Analysts believe that the upward revisions to Euro Area consensus growth forecasts have now largely run their course (taking 2016 GDP consensus to 1.8%). Likewise, the correction in 10-year Bund yields from 7bp to 72bp flushed out excessive longs and should now be over. The ECB will increase the pace of QE in the next few weeks, and the narrowing in the Treasury/Bund and Gilt/Bund yield spreads should now pause.
US growth should pick up in the months ahead from the winter softness. The pace of the recovery continues to be tepid, but employment and real income growth are strong enough to suggest that a 2 ½ % or so real growth rater will be maintained, and that remains inconsistent with current monetary policy settings.
Socite Generale expects a September lift-off for Fed Funds and so little is now priced into the Fed Funds futures curve (1% Fed Funds at the end of 2016) that even a single rate hike would cause a re-pricing supporting the dollar.
The Sterling money market prices rates at 1% at the end of next year too. So any upside economic or inflation surprises could trigger a re-pricing and a flattening in the yield curve. But with a Budget announced for July 8 and CPI falling in the year to April, the first UK hike still seems to be more likely to come in 2016 than 2105, lagging the Fed by a clear margin.
