Toward a Slower than expected Rate Cut in the UK.
In the UK, the Labour government has just presented its highly anticipated first budget. As expected, this budget emphasizes increased spending and investment, funded by higher taxes. These measures aim to stimulate economic growth, a priority that the government has made clear. However, the markets reacted negatively, with a rise in yields and a weakening pound, reflecting concerns over the growing budget deficit and inflation risks associated with this fiscal stimulus. Investors likely still recall the turmoil caused by Liz Truss’s unfunded budget proposal. We do not share these concerns and believe the market reaction is overdone. However, markets will likely need to adjust their expectations for Bank of England rate cuts. While the expected cut in November appears secure, the trajectory for 2025 may prove more gradual due to the inflationary pressures arising from this new budget.
Back to Square One for Swiss Inflation!
Switzerland’s inflationary surge proved to be short-lived. In October, consumer prices rose by only 0.6% year-on-year. This inflation slowdown is progressing more swiftly than anticipated, surprising economists and likely even the Swiss National Bank’s (SNB) governing board. It’s worth recalling that Switzerland’s inflation was far less pronounced than that of neighboring countries during the recent inflationary shock. Following the COVID-19 pandemic and the onset of the war in Ukraine, annual inflation surged beyond 10% in the Eurozone, whereas in Switzerland, it was limited to around 3%.
Are there structural factors that explain Switzerland's enduring price stability? Our country’s openness to global trade, alongside a relatively liberal stance on international commerce and foreign labor, contributes to containing inflationary pressures. Equally influential, however, is the strong Swiss franc, which exerts a significant disinflationary effect, particularly against the euro and the dollar. Over the past five years, the Swiss franc has appreciated by over 15% against these currencies, markedly reducing imported inflation. This trend could well continue in the coming years. Contrary to popular belief, the franc may not be as overvalued as it seems; Purchasing Power Parity (PPP) metrics currently suggest the franc is near its fair value against the euro.
The easing of Swiss inflation points to a further rate reduction by the SNB. We anticipate at least two additional rate cuts in the upcoming SNB meetings, with the SARON rate likely approaching 0.5%. However, continued disinflation in 2025 could compel the new SNB president to consider a return to a zero-rate policy. Observing the Swiss bond market, where yields on maturities beyond one year remain under 0.5%, it is clear that investors have already factored in a prolonged period of price stability and low interest rates in Switzerland.
This week’s figure: 46.5
The leading indicator of manufacturing activity in the United States came in weaker than expected in October. It remains firmly in contraction territory, as it has for the past two years. This release makes a Fed rate cut on Thursday inevitable, to be followed by further easing in December.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
