Tomorrow we have the last major bit of data for the week, which could set the trend for the next couple of days.
Inflation is one of the key data points tracked by the SNB, so it gets a lot of attention. That being said, the central bank in Switzerland is not due to meet until December. And this leaves the currency to move on its own.
CPI in Switzerland hasn’t been near the SNB’s target in years. In fact, it has been trickling lower since peaking in mid-2018.
The move is in conjunction with a slowing economy and increasing demand for safe havens that have pushed up the value of the currency and made life difficult for exporters.
The market appears to have internalized the reality of low inflation staying low for a long time.
What We Are Looking For
The market tends to focus on the monthly CPI figure, which is expected to increase slightly to 0.1% from 0.0% prior.
Low as it is, it’s still an improvement over repeated negative rates that have been the most common since the economic slump began late last year. At these low rates, just a decimal or two difference can have a big impact. The market reacts to relatively small changes.
Expectations are for annualized CPI to be just 0.2%, a decrease from 0.3% in the prior month. This would be the slowest growth since late 2017.
Negative inflation (deflation) is a common occurrence in Switzerland, usually in times of global economic stress. While such a low inflation rate in most other countries would have the central bank scrambling, the SNB is more sanguine.
The Exceptional Swiss
Like with their unemployment rate, Switzerland has a unique situation when it comes to their consumer prices.
Unlike any other currency, the Swiss franc is still backed by gold. Around 20% of their money supply is tied to the yellow metal. This means that inflation and deflation comes not just from economic situations, but also from changes in the price of gold.
As the trade war continues and the global economic outlook remains uncertain, gold has been climbing since last October. This is putting pressure on Swiss inflation.
In the meantime, large foreign cash flows seeking a safe haven have put pressure on the value of the Swiss Franc, diminishing the cost of imported goods.
Money is Scarce
On the demand side, a recent survey of managers showed that Swiss businesses are planning to raise wages by an average of just 1% this year.
Given the SNB’s expectation of inflation, that would imply a real increase of 0.8%, and slightly below the long-term average. This lower than average increase in income will lead to less inflationary pressure both this year and next.
It might be one more bit of evidence that the SNB needs to redouble its efforts to support price increases.
The thing is, though, there is a growing consensus that negative rates are not effective in the current circumstances and no substitute for fiscal reforms.
And to make matters worse, most of their economic problems are imported from their neighbors and largest trade partners. Recent reports are showing slowing manufacturing output, and it’s likely to remain low. So, there isn’t much to drive inflation higher in the near future.
That would be expected to increase demand for the franc as a safe haven, further supporting the currency despite the SNB’s intervention to keep it in line.