“Words are, of course, the most powerful drug of mankind.”
-Rudyard Kipling
Words are powerful. But for stock markets, there is generally nothing more powerful than a good dose of cowbell from the central bankers. This morning Switzerland’s central bank delivered just that!
The Swiss National Bank (SNB) cut by 25bps. The Swiss Franc is one of the 10 most highly traded global currencies, so this move has a real impact on currency markets. The immediate impact is the franc falling against the euro by -1% and -1.2% against the dollar.
In conjunction with this rate decision, the SNB declared the fight against inflation over.
According to SNB President Thomas Jordan:
“The easing of our monetary policy has been made possible because the fight against inflation over the past 2 1/2 years has been effective.”
In conjunction with this move, the SNB also unveiled a lower CPI forecast that is +1.5%, or below, through 2026.
Just like that . . . inflation has been conquered and Switzerland is no longer neutral.
Realistically, inflation in Switzerland was never that big of a problem. CPI peaked at +3.5% Y/Y and in the most recent report fell to +1.2% Y/Y, which was the lowest reading since October 2021.
In part, this is because Switzerland calculates CPI very different than most countries. CPI in Switzerland is much less leveraged to commodities and much more leveraged to prices that the government generally controls, like healthcare.
So, while words are powerful, we aren’t sure how much bankers stating a three-year CPI projection matters in a country where inflation is mathematically understated. But, delivering the cowbell will have an impact, at least in the short term . . .
Back to the Global Macro Grind…
The irony, of course, in cutting rates now in Europe is that the recession is largely in the rearview mirror. While some of the data is still mixed, yesterday’s Zew Economic Index for Europe, which is included in the Chart of the Day, hit a more than two-year high at +33.5 for March and was much more definitive on the recovery being in full swing.
To be fair not every central bank is lowering rates. In fact, in the last couple of days we have had two that have increased rates:
- Taiwan raised rates by 125bps to 2.0%; and
- Japan raised rates for the first time in 17 years from -0.1% to a range of 0.0% to 0.1%.
Certainly, moves like that in places where rates are already relatively low shouldn’t have a meaningfully negative impact on global liquidity . . .
In a day in which we are focused on central banking policy, we would be remiss not to highlight the FOMC meeting yesterday. In a nutshell, Chair Powell was more dovish than expected.
This likelihood was something Keith has been highlighting with rates ramping into the meeting and Fed Funds Futures pushing out the probability of a cut.
Those expecting anything hawkish were disappointed. The Fed’s statement stayed virtually the same, Powell again indicated that the first cut is likely to come “at some point” this year, and a majority of the Fed sees three cuts this year based on the dot plot.
This “dovish surprise” led to an immediate shifting in Fed Funds Futures probabilities of a cut:
- June shifted from a 59% of a probability of cut to a 75% probability of a cut; and
- July shifted to an 88% probability of a cut and a 37% probability of a second cut, from 76% and 30%, respectively.
So, maybe the drug of central banking words does matter? Especially when it comes with the potential for more cowbell!
The problem with all of this is that cutting rates, or delivering the cowbell, is ultimately inflationary. The Fed acknowledged as much in raising its inflation forecast yesterday from 2.4% Y/Y to 2.6%Y/Y. At the same time, the Fed also increased its economic projection for 2024 from 1.4% to 2.1%.
Accelerating growth and inflation sounds a lot like #Quad2. And #Quad2, my friends, is a pretty good for stocks and taking risk. As luck would have it, #Quad2 is exactly what our GIP model has as the most probable outcome for Q3 and Q4.
Finally, as a reminder our Macro Team is giving their Q2 Macro Themes presentation today at 11am eastern. Ping if you need access.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 4.07-4.42% (bullish)
UST 2yr Yield 4.47-4.79% (bullish)
High Yield (HYG) 77.11-77.98 (bullish)
SPX 5117-5249 (bullish)
NASDAQ 15,984-16,450 (bullish)
RUT 2024-2093 (bullish)
Tech (XLK) 205-212 (bullish)
Insurance (IAK) 112.17-116.34 (bullish)
S&P Momentum (SPMO) 77.69-80.91 (bullish)
Healthcare (PINK) 29.66-30.55 (bullish)
Shanghai Comp 3024-3099 (bullish)
BSE Sensex (India) 71,801-74,298 (bullish)
DAX 17,791-18,140 (bullish)
VIX 12.44-15.22 (bearish)
USD 102.69-103.91 (neutral)
GBP/USD 1.267-1.285 (bullish)
Oil (WTI) 78.73-83.97 (bullish)
Nat Gas 1.60-1.90 (bearish)
Copper 3.94-4.21 (bullish)
MSFT 411-431 (bullish)
AAPL 168-179 (bearish)
NVDA 850-935 (bullish)
Bitcoin 61,901-74,258 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
