A Divided Fed

The macro point

This is not the first time this has happened. And it is all the more normal due to the absence of economic data because of the prolonged shutdown, which is fortunately over. The members of the FOMC (the body responsible for deciding the level of U.S. federal rates) are divided on the decision to be made in December. Stephen Miran, close to the Trump administration, continues to advocate for a 50 basis point rate cut – as he has since September. He believes that the labor market is showing signs of weakening, confirmed by the ADP survey. This showed that the U.S. economy lost 11,250 jobs in the week ending October 25. This is significantly more than usual. However, it will be necessary to see if this affects all sectors or only some, more impacted by AI. However, there is little chance that the FOMC will vote in favor of such a significant rate cut. Miran is part of the minority.

The representative of the San Francisco Fed, Mary Daly, is less extreme than Miran but also advocates for a rate cut (-25 basis points). She indicated in an interview last week that the U.S. economy is facing a negative demand shock and that inflation remains well anchored for now. She represents the majority view within the FOMC.

At the other end of the table, we find Alberto Musalem, president of the St. Louis Fed, who advocates for the status quo, believing that the U.S. economy will strongly rebound next year.

Interestingly, no one within the FOMC anticipates that inflation will rebound or is too high. This is an interesting shift in discourse compared to the spring.

Our opinion: we think like Musalem that the U.S. economy will rebound in 2026, notably due to the economic impact of rate cuts and the gains made by American households in the stock market, which will boost consumption. It should also be noted that the Trump administration is considering the possibility of sending checks to households – as during Covid – to support economic activity. All this should help support growth. Even if the economic outlook is generally positive, a new rate cut in December seems appropriate to us (even inevitable), given that the U.S. central bank has not yet reached the neutral rate. This is also the opinion of the money market. Despite sometimes contradictory speeches from FOMC members, rate cut expectations are stable, around 70%.

In Europe, the situation is somewhat less favorable. In the United Kingdom, the unemployment rate has risen above 5%. This is not alarming, but it is a negative signal. In Germany, economic confidence, measured by the ZEW, fell in November due to concerns about German economic policy and the slow implementation of the 1,000 billion euro recovery plan announced at the beginning of the year. Barring a surprise, Germany should still be in economic stagnation this year. It is only next year that growth could restart... while remaining weak.

Finally, China is exploring new ways to boost consumption. Besides the usual checks to households, which have only a weak effect on growth, the politburo (China's decision-making body) is considering implementing more protective social safety nets for the unemployed and retirees. Caution, the idea is not to adopt the European model, often considered idle by the Chinese. However, a small improvement could restore confidence and, accordingly, consumption.

Technical point

In the foreign exchange market, we do not think that the most movements in the weeks and months to come will be on the EUR/USD. We reiterate our target of 1.18 for the end of the year. However, there is a high risk of increased volatility on the EUR/CHF. The Swiss National Bank (SNB) has reasons to stop defending the informal floor rate of 0.92 franc against the euro, on which the franc had already rebounded in the summer of 2024 and then in the summer of 2025. The macroeconomic conditions remain favorable in Switzerland and no longer require manipulating the currency. Furthermore, massive intervention in the foreign exchange market is frowned upon by the United States in a context of trade tensions that can intensify at any time. As always with the SNB, letting the franc slip will be done gradually. But it could be significant, especially if you are exposed as a business to the currency. It is therefore imperative to review your hedging strategy to guard against this risk - still overlooked by the market.

Announcements to follow

With the end of the American shutdown, statistics will be published again - often with much delay, so the impact on the market could be weak. Although these are not usually important figures, the PMI indicators to be released on Friday will provide an initial insight into the state of the US economy in November. During their last publication, they were in expansion phase - confirming that the services and manufacturing sectors are doing well. It is unlikely to see deterioration within a month.

Finally, eurozone inflation will be published this week. Unless there is a surprise, it should continue to fluctuate around 2%. We do not think another rate cut by the European Central Bank (ECB) is feasible at the moment. It would not change the macroeconomic situation.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to buy, and should not be used or considered as an incentive to engage in any investment.