Wait-and-See

The macro point

For those who were hoping for some clarity regarding the Fed's monetary policy, you were certainly disappointed. See you in June to learn more!

Those who hoped that the Federal Reserve (Fed) would outline a clear path for the coming months have been disappointed. The central bank remains in a wait-and-see position, mainly due to the difficulty in obtaining reliable (which does not necessarily mean truthful) forecasts. The context of a tariff war doesn’t help.

Let's take inflation related to tariffs. Obviously, it will spread throughout the economy, but it won't be linear. The decline in economic activity will automatically lead to a reduction in inflationary pressures. Whenever possible, the American consumer will turn to local substitutes, including in services. Furthermore, we must account for the unexpected effects of protectionism. They are already apparent. In April, we observed a drop in the prices of airline tickets (-5.2% year-on-year), hotel rooms (-3.7%), and gasoline (-9.8%). This is related to the collapse of foreign tourism in the United States. This should intensify this summer. Finally, we must consider the continued decline in rents, which tends to reduce inflationary pressures. In short, it is difficult to say that protectionism systematically results in a sudden surge in inflation. This is precisely what complicates the Fed’s task.

For now, the money market still anticipates a 25 basis point rate cut in June. This is not guaranteed. It will likely take another three to four months before we can estimate with more certainty the real impact of tariffs already implemented and those that could be once the 90-day moratorium expires at the beginning of July. The Fed therefore has every interest in taking its time and lowering interest rates at the earliest in July. Only a significant increase in the unemployment rate by summer, around 4.5%, could prompt it to accelerate the rate cuts. We are far from that since the unemployment rate is at 4.0% and job creation is strong, as revealed by the latest monthly report from the Department of Labor.

In Switzerland, the return of negative rates (which were presented as a financial anomaly not intended to recur) is almost certain. Inflation in the Swiss Confederation has reached 0% due to a drop in the cost of oil, imported goods, and low domestic inflation. Excluding rents, the consumer price index is even negative at -0.7% year-on-year in April. Under these circumstances, the Swiss National Bank should move its key rate into negative territory quickly. Its next meeting is scheduled for June. Initially, the consensus expected it to lower its rate by 25 basis points. It might be tempted to hit harder, with a 50 basis point cut. For now, despite the prospect of cheaper money, the Swiss franc remains strong due to the troubled geopolitical context (U.S. tariffs, disintegration of Bosnia, high tensions between India and Pakistan, unrest in the Middle East, etc.). This is unlikely to change anytime soon.

Finally, unsurprisingly, the Bank of England (BoE) cut its key rate by 25 basis points. This was expected by traders and thus priced by the market. Due to the reduction in inflationary pressures and the economic slowdown underway, we anticipate that the British central bank will make a 25 basis point rate cut every quarter at least until the end of the year. This should exert little influence on the exchange rate of the pound sterling. Unlike the Fed, British monetary policy is rather clear. That’s the good news of the week.

Technical point

In the foreign exchange market, the EUR/USD is rather stable. From a technical analysis perspective, the underlying trend is still bullish even though in the short term the US dollar has been somewhat supported by the rebound in US stocks - as observed last week.

Our attention was especially drawn to Asia. Several currencies in the region, particularly the Taiwanese dollar, witnessed a sudden surge in volatility during recent sessions. How to explain this? Investors believe that the trade agreements being negotiated between the United States and Asian countries will include a clause forecasting an appreciation of local currencies against the greenback. It's logical on paper – the US dollar is clearly overvalued. But it's not certain in practice. If you are exposed to Asian currencies, consider adjusting your currency hedge.

Announcements to follow

This week, economic news is mainly American. Inflation figures (consumer and producer prices) will be of utmost importance as they will allow assessing inflation trends in the context of the trade war. This will be valuable for the Fed. Also, watch the Philadelphia Fed Manufacturing Index. Usually, it's a minor indicator with little market influence. But the Fed recently published a study showing it quickly reveals cycle reversals. It's very useful for knowing whether the US economy is heading towards a recession or a slowdown (this is our scenario).

The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, a sales offer, or a solicitation to buy, and should in no case serve as a basis or be considered an incentive to engage in any investment.