Some investors were convinced that the Federal Reserve would bow to pressure from Donald Trump and deliver a rate cut, or at least operate a dovish in its monetary policy assessment. It didn’t happened. It thus came as no surprise that equities struggled to add gains, especially as most indices are currently testing key resistance levels. After climbing to all-time high levels last Thursday, the S&P 500 failed to holds ground above the 2,940 threshold and stabilised around 2,917 points, down more than 1.20% from its record high. Across the Atlantic, the situation is relatively similar as the EuroSTOXX 600 tumbled on the 395 threshold, which corresponds roughly to the top of its multi-year range. However, on Friday, both indices are blinking green against and are testing fresh highs again.
Regarding Wednesday meeting, it would have been easy to conclude that the FOMC has mislead markets by choosing to stand idle, which ultimately triggered a small correction in equity markets. However, we believe that is more Donald Trump who misled investors by calling aggressively for a rate cut, while the economic situation does not justify such a move. Even though central banks have more than a fair share of responsibility in the decade long bull market, it is still not their job to prop up equity prices. The Fed is now in a good old “wait-and-see” mode and may stay there many months. Against such a backdrop, investors would have choice but to start monitor hard data again and read the tea leaves as well to figure out Powell’s next move.
April job report is due today. The least we can is that market participants do not have high expectations as nonfarm payrolls should print at 190k, down from 196k in March. The unemployment rate is expected to come in stable at 3.8%. On the bright side, investors anticipate that nominal average wage growth would have accelerated to 0.3%m/m from 0.1% in the previous month. In the FX market, the dollar continues to climb its way back after a sharp-sell off. We believe that the Fed decision to stay on the sidelines would give leg to the dollar rally, especially against the backdrop of faltering growth and loose monetary policy in most other countries.
Swissie in decline as economic data recede
As expected, the Swiss economy is facing a slowdown phase in 2Q 2019. Recent economic figures presented a rather gloomy outlook. The April manufacturing PMI gauge is now in contraction territory, while regardless of a slowdown in CPI figures at first sight, it seems that Swiss consumers will pay more for their actual consumption. Furthermore, the resumption of downturn in the KOF barometer indicator and private consumption makes the picture less pleasing.
The recent publication of the first quarter 2019 results of Geberit, Switzerland’s leading supplier of sanitary products stating that 2019 is going to be a challenging year due to increasing volatility in the EU (i.e. Brexit, Italian politics) and a slowdown in construction activities, is precursor of what might happen on the Swiss economy. Despite the not-so alarming tone from economists, April manufacturing PMI have been falling at 48.5 (prior: 50.3), its lowest level since September 2015 after the SNB de-pegged the EUR/CHF rate of 1.20 while forecasts were pointing to a rebound to 51. Furthermore, the Raiffeisen SME PMI, although still above the 50 mark, shows a downward trend in order books, thus requiring careful monitoring of future developments. Consumer prices remain in line with expectations, with y/y and m/m figures at 0.70% and 0.20% respectively while a rebound in gasoline (+3.70%) and airline transportation (+4.90%) prices from March should weigh on Swiss consumption. Although the situation remains under control, further caution is required, as an escalation of trade tensions between the US and the EU could have adverse consequences on the Swiss exporting industry.
EUR/CHF is trading at 1.13904, heading along 1.14170 short-term.
