Cue the Interest Rate Cuts

The Swiss National Bank (SNB) cut rates by 25bps this morning, sending the Swiss franc lower against peers, with the euro jumping to its best since July 2023 against CHF. At the time of writing, the EUR to CHF pair was trading at 0.9752, signalling 0.66% of gains for the euro.

Inflation fell to 1.3% in January and 1.2% in February, plus the SNB was uncomfortable with CHF strength.

If you are about to hit the slopes, this could be a bonus! But it’s interesting now because we are entering a multi-speed exit from the tightening phase of the cycle and central banks are starting to need to think for themselves again and take things in the direction that best suits their economy.

Other Central Banks to Follow?

The SNB is in a rush to cut; the U.S. Federal Reserve (Fed) seems to be prepared to sequence it neatly despite inflation running at 4%; the Bank of England (BoE) will see inflation down to 2% this quarter but is not seen cutting until later this year.

It’s getting interesting again and forex volume may be returning. The question now is does this SNB signal the rush to the exits – could the European Central Bank now move in April? I don’t know – they didn’t seem all that keen to think earlier than June, but German bund yields are trading sharply lower off the back of the SNB cut this morning.

USD/CHF hits best since November, extending break north of the 200-day.

It is worth pointing out just how different it is in Switzerland.

Here’s what the SNB said this morning:

“The easing of monetary policy has been made possible because the fight against inflation over the past two and a half years has been effective. For some months now, inflation has been back below 2% and thus in the range the SNB equates with price stability. According to the new forecast, inflation is also likely to remain in this range over the next few years.” 

The forecast puts average annual inflation in Switzerland at 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026.

Bank of England

Now over to the Bank of England, which will leave rates unchanged — the question is to what extent that 6.1% services inflation reading is a worry — or do they likewise throw in the towel and admit that there is no point in trying to get inflation down sustainably to 2%?

Sterling trades a tad lower ahead of the Bank of England decision — no cut likely — after rising sharply yesterday on the softer USD.

Stocks Rally After Fed Meeting

Stocks surged to fresh highs as the Fed sounded a dovish note and indicated it’s still looking to cut three times this year. The Stoxx 600 hit a new record high this morning as shares in London, Frankfurt and Paris all rose sharply in the wake of the FOMC’s decision, which saw rates left unchanged for now but the market under the impression that the Fed is not about to delay on easing.

The FTSE 100 rallied through the 7,800 level to hit its best since early May 2023 in early trading this morning after the Dow Jones, S&P 500 and Nasdaq Composite all jumped to record closing highs. Tokyo followed suit as the Nikkei also broke a new all-time high.

The positive mood helped risk and sent yields down, gold up, and the dollar down. Treasury yields slipped back to lift the gold price to a new high. Bitcoin got in on the action to rally sharply off a two-week low. Meanwhile, the Japanese yen made a break higher on ‘sources’ suggesting that the BoJ could hike again in the summer. Classic soft intervention to stop the run on the yen.

What to Make of it All?

Three cuts in 2024 with core PCE seen at 2.6% is like sending up the white flag — they’re now tacitly accepting that they won’t or can’t get back to 2%, as anticipated in these pages. The core PCE projection was revised up since December but still sticking to three cuts. Jobs are more important than prices = it’s an election year.

Indeed, chair Powell said that “strong job growth is not a reason for us to be concerned about inflation”. Powell's basic stance on the recent high inflation: "We don't really know if this is a bump on the road or something more. We'll have to find out."

The projections are all way too neat for my liking – 2.0% for both headline and core PCE inflation in 2026. This was tacit, not yet explicit, acceptance of a willingness to tolerate higher inflation to juice the jobs market. Higher for long is for inflation, and immigration.

Powell said “financial conditions are weighing on the economy”.

Here’s what those financial conditions look like:

Powell: “The economy is strong; the labour market is strong, and inflation has come way down”.

The U.S. jobs market:

Question: if you are saying you will cut rates with inflation still above target to maintain a jobs market where all the jobs are going to foreign workers, who are you looking out for? What is the purpose? It looks very political.

Meanwhile, purchasing power has collapsed by around 30%.

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