With below-target inflation, sluggish economic growth and a strong currency, the SNB should seek to outpace the ECB in its downward cycle in order to hamper the franc’s upward trajectory.
Swiss National Bank (SNB) – December 12
Markets expect the SNB to cut rates by 50 basis points and bring its key rates to 0% over the next six months. With inflation below target (headline inflation of 0.7% and core inflation of 0.9%), sluggish economic growth and a strong currency, the SNB should seek to outpace the ECB in its downward cycle in order to hinder the upward trajectory of the franc. But the latter seems more sensitive to the trajectory of gold than to interest rate differentials, so the effectiveness of this strategy remains to be demonstrated.
The European Central Bank (ECB) – December 12
Markets expect a monetary policy rate cut of 25 basis points this week, and then one per meeting until it reaches 1.75% next summer. The main question lies in the possibility of seeing a super drop of 50 basis points over this period.
In our opinion, fears of an economic slowdown linked to possible tariffs from Mr. Trump and political uncertainty in the region mean that the landing rate could be lower than market expectations (i.e. 1.5% or less). However, we believe that a cut of 50 basis points is unlikely for the moment, given the economic growth which surprised on the upside in the third quarter, the prospects of a less favorable American monetary cycle since the last ECB meeting and that it is too early to integrate the negative effects of possible future Trump 2.0 policies.
The ECB could nevertheless signal its intention to move from a “meeting by meeting approach” to a “desire to move closer to the neutral rate” in order to take into account the risks associated with weak consumer sentiment and political uncertainties. In doing so, it could reestablish some form of forward-looking vision on a more accommodative monetary policy path.
Finally, the month of December will also see the end of reinvestments of bonds held within the framework of its purchase programs (both for the APP1 that the PEPP2). So, from 1is January 2025, the ECB’s balance sheet will decrease by 40 billion euros per month. The disappearance of a price-insensitive buyer, 10 years after the start of the APP, also calls for a certain form of caution on the euro rate markets. Indeed, 2025 should be another record year in terms of government bond issues; 600 billion euros in net emissions are expected next year and the deficit trajectories of countries such as France are not expected to be as benign as initially expected. In this context, European sovereign bonds should not be particularly popular with investors, especially since it is possible to find better yield opportunities elsewhere and certain issuers, such as France, could see their rating deteriorate.
The Federal Reserve (Fed) – December 18
Unlike the ECB – given a solid economic growth environment in the United States – it is inflation data that must be at the center of the Fed’s concerns. Markets are not fully pricing in the possibility of a 25 basis point cut at the December meeting and are expecting just three rate cuts over the next six months.
If we anticipate a second consecutive rate cut of 25 basis points for the Fed next week, we estimate that it should end its cycle of monetary policy rate cuts during the first quarter of 2025 on a plateau of 4%.
In the short term, it is unlikely that the Fed will seek to anticipate what the policies of the future American administration may be. It should therefore, for the moment, remain on the accommodative path it has traced since its first rate cut last September.
However, in the medium term (one to two quarters), if the Trump 2.0 measures pushed growth, that is to say prices and a deficit upwards while the production gap is largely closed, the Fed could adopt a restrictive tone.
In the short term, the US yield curve is expected to steepen, with markets not fully reflecting expected interest rate cuts or persistent inflationary pressures. Currently, bond markets reflect a relatively benign inflation scenario.
Impact in terms of bond management
In conclusion, we remain cautious on the interest rate markets of developed countries.
Market expectations regarding ECB rate cuts in the short term are optimistic and the markets have rushed to integrate American exceptionalism, so we prefer American rates to Euro rates on short maturities.
We largely stay away from developed market sovereign bonds which, despite the circumstances, offer a meager yield of between 4% (in USD) and 2% (in EUR) for core countries – and little more for so-called countries. “peripherals” or “semi-devices” (for now).
Finally, a flat yield curve and the persistent question of inflation encourage us to prefer real rates (i.e. linked to inflation) to nominal rates.
1 Asset Purchase Program
2 Pandemic Emergency Purchase Program
