Swiss’s CPI contracts in October, building the case for a rate cut by the SNB
Switzerland’s headline inflation missed widely expectations in October. The consumer price index contracted 0.3%y/y, following a decrease of 0.1% in the previous month, while market participants anticipated a flat reading. This is the lowest reading since November 2016, when the global economy was recovering from the 2014-2016 slump. Similarly, the core gauge, which excludes the most volatile components such as energy products, eased to +0.2%y/y, below market expectation of 0.4%. EUR/CHF barely budges as it rose slightly to 1.1014, printing the high of the day, in anticipation of looser monetary conditions in Switzerland.
Looking at the details of the report, one notices that most of the downside pressure on prices came from Food & Non-alcoholic Beverages and Restaurants & Hotel Accommodations, which contracted by -1%m/m and -0.5%m/m respectively and contributed -0.105% and -0.05% to the total monthly variation. One also noticed that on a year-over-year basis, most of the negative pressure came from imported products, suggesting that the constant appreciation of the Swiss franc since April 2018 is responsible for this negative trend.
Signs mount that the Swiss economy is going through a soft patch against the backdrop of a slowing German economy, lingering trade war uncertainty and continuous strength of the Swiss franc. Despite a solid growth rate of 2.8%y/y in 2018, the economy is expected to decelerate substantially in 2019. After increasing only 0.4%q/q in 1Q and 0.3% in 2Q, the GDP should increase by only 0.1% in the third quarter.
Obviously, this slump in inflation could only add to the case of further monetary easing from the SNB. Since July, the Swiss central bank started to intervene in the FX market to slowdown the appreciation of the Swissie as total sight deposits held as the SNB rose from 579bn to 592bn. However, this might not be enough as central banks across the globe are all cutting interest rates steadily, if not relaunching quantitative easing programs (ECB and the Fed for example) in an attempt to revive inflationary pressure and boost growth (and devaluate their currency, incidentally). Against such a backdrop, the SNB needs to be ready to lower interest rate further. The announcement of the new tiering system, which is coming into force today, was a first step toward lower interest rates. Indeed, at first, it looks like the SNB is releasing the pressure by allowing banks to pay negative rate on less deposits. However, we believe this is just the opening act for further rate cuts as it allows Mr. Jordan to make a statement by acting loudly by cutting rates, while at the same it will have a lesser effect on banks’ profitability as the new tiering system allows banks to shelter more money from negative rates.
USD relaxing ahead of jobs report
The most expected Fed hawkish cut followed by the negative release of September Core PCE and Chicago PMI have maintained investors on the sideline ahead of key labor and manufacturing data to be released today. Considering the latest statement from Fed Governor Jerome Powell and a dull bias on upcoming data, the greenback should decline slightly. Although it has decided not to ease interest rates, the Bank of Canada also seems more dovish, but it should not reduce its rates by 2020, making the loonie the most attractive currency in the G10 thanks to its interest rate advantage.
The center of attention now turns on today’s October unemployment data, which is expected to mark at 3.60% (prior: 3.50%), as the 40-day long General Motors strike launched in mid-September with a total of 46000 GM employees on strike in October and classified as unemployed, is expected to weigh on the measure as well as manufacturing data. Despite disappointing October Chicago PMI figures displaying at 43.2 (prior: 47.1; consensus: 48), lowest since December 2015 due to growing uncertainties relating to Boeing plants located in the region, ISM manufacturing data are expected to improve from September 47.8 range, although it should stay in contraction territory. However, it should be kept in mind that the latter will not have a major impact on the Fed’s economic assessment following yesterday’s FOMC meeting as it considers current rates level as appropriate for the foreseeable future amid moderate growth and muted inflation along the 2% range.
Following the releases, USD/CAD is expected to reverse, approaching 1.3135 from current 1.3167.
