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Switzerland surprise cut. Why?

Global cutting cycle begins. Fed can't explain itself. My thoughts on the inflation & stocks train that won't stop. Some departure from consensus.

Nik Bhatia

Mar 21

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Dear readers,

Overnight, the Swiss National Bank (SNB) cut rates in a surprise move and the first move lower among major Western economies. Yesterday, Jerome Powell insisted that cuts are eventually arriving later this year. Yet corporate bond issuance is at an all-time high, global air traffic is at an all-time high, and stocks literally cannot find a lid. Today I bring you my understanding of the current dissonance, why I’m starting to fade the consensus view, and a key look at the S&P 500 chart.

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The Swiss go first

A global rate cutting cycle has begun, and by the end of today’s post you will understand why I believe investors must factor in central bankers’ insistence on lowering policy rates.

Let’s start with Switzerland’s central bank:

In a very important preface, the SNB made sure to signal the reasoning for its action:

The Swiss National Bank unexpectedly cut its key interest rate by 25 basis points, moving months ahead of global peers as policymakers try to prevent gains in the franc.

If the SNB is trying to prevent gains in the franc, what would cause them in the first place? As Switzerland’s primary monetary concern is its pseudo-peg with the euro, the expectation of rate cuts in Europe—the EU is in terrible economic shape with Germany in recession—should drive capital, at the margin, away from the euro and into the Swiss franc. Appreciation in the Swiss franc counters the SNB’s objectives, therefore requiring a preemptive interest rate cut ahead of the ECB’s next move. While we made a call in December 2023 for ECB cuts by March (and Fed cuts by June), the ECB failed to deliver a cut. Now, with the SNB leading the way, we might see the European authorities capitulate.

Europe is certainly a different economic animal than the United States—the continent’s economy is struggling relative to the US, with a likely explanation being fiscal dominance on which we will deliberate further today. It makes sense, then, that European central banks are having a go at monetary easing. Notice the first realized cut in silver, while other policy rate futures curves all slope in the same direction, downward: