(01 November 2019)DAILY MARKET BRIEF 1: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.

By Arnaud Masset