A tale of two central banks: the ECB navigates stagflation and the SNB fights deflation pressures coming from CHF strength

Flash note

Flash note

Here's a summary of the Federal Reserve’s decision: 1. Interest rates cut by 50 bps for first time since 2020 2. Rate cuts 2 more 25 basis point in 2024 3. Fed governor Miki Bowman dissented in favour of a smaller 25 bps cut. It's the first dissent by a "governor" since 2005 4. Gained "greater confidence" that inflation is moving to 2% 5. Have an evolving outlook as "carefully assess incoming data" 6. Rate cuts of 100 bps in 2025 and 50 bps of cuts in 2026

The US labour market is cooling down, and today’s Employment report brought another confirmation of this trend. Job creations in the private sector have settled below 200k per month throughout Q2 and declined to 136k in June. The unemployment rate ticked up to 4.1%, its highest level of this expansion cycle. Only government jobs continued a solid upward trend, which may not be surprising in an electoral year. The normalisation of the US labour market is one of the five key trends to watch for the next 6 months (cf. Syz H2 2024 Market Outlook: Normalisation ahead). Today’s US Employment Report fits into this dynamic, which is at the heart of our expectations for economic growth normalisation, softer inflationary pressures and central bank rate cuts.

The SNB has lowered its key rate again today, to 1.25%, after the previous 25bp cut decided in March. This decision appears grounded in a combination of three factors: inflation is on a stable and moderate trajectory, economic growth remains soft and excessive upward pressures on the CHF may arise during the summer.. With this decision, the SNB has likely completed its monetary policy recalibration and is unlikely to cut rates further this year.. Should European or global developments trigger volatility and upward pressures on the CHF, the SNB will probably resort to interventions on the FX market to manage the impact on the economy, rather than use the interest rate lever.

The past couple of weeks have brought useful insights about the US economy. And although pockets of weakness, risks and uncertainties remain, while the Presidential election looms, the general situation today appears to be quite good for the world’s largest economy. Business activity remains clearly positive, inflation has resumed a slowing trend after a short-lived unexpected pickup, and the Fed has clear room for easing its monetary policy if needed but has no need to rush neither. The scenario of a smooth, soft landing, where inflation would gently converge toward the Fed target, growth would gently converge toward its long-term potential, and the Fed would eventually gently loosen its monetary policy toward a neutral stance, no longer appears to be a pipe dream.

After months of speculations, this week could mark the start of the long-awaited global rate cut cycle across developed economies. (...)

An update on latest developments in the US economy

The Swiss National Bank cut its key rate to 1.50%, surprising markets as the first major central bank to lower rates post the 2022/23 hike cycle, citing effective inflation control and improved economic growth forecasts, aiming to support economic activity without undue pressure.