Rising interest rates

The Fed responded to investors’ expectations by raising its key interest rates by 75 basis points to 1.50%, its biggest increase since 1994. Its director, Jerome Powell, reaffirmed his determination to fight inflation, while assuring that the size of the June increase was not the norm. He considered that monetary tightening would weaken the labour market (a necessary development to ease price pressures), but confirmed that the central bank was willing to risk a recession to fight inflation.

The SNB took the markets by surprise by raising its key rate first time in 15 years by 50 basis points (to -0.25%) at its quarterly monetary policy review. While a increase of rates was already planned and justified by the high level of inflation (2.9% in May), the speed of the move, its scale and the fact that the SNB decided to act before the ECB came as a surprise. The intensity of price pressures in a tight employment environment and the risk of overheating in residential real estate contributed to the SNB’s decision. The SNB also seized the opportunity of the Fed and ECB announcements to make its move. The strengthening of the franc, which is no longer so overvalued against the euro and which had fallen against the dollar, is welcome, as it will help contain import prices. The SNB is expected to exit its negative interest rate policy again this year.

Eurozone industrial production rebounded slightly in April, but it remains disrupted by supply problems.

United States Retail sales fell by 0.3% in May. The decline in sales across many categories of goods suggests that rising prices are beginning to dampen household consumption.

The magnitude of the Fed and SNB rate hikes hurt bonds, pushing 10-year rates to their highest levels of the year.

Fears of a sharp economic slowdown were heightened by the more aggressive stance of central banks to counter very high and persistent inflation. The US market suffered its worst weekly decline since March 2020, with all sectors ending in the red, including the energy sector (-17%), which had so far been preserved by rising oil prices.

Yesterday The New York Stock Exchange finished sharply higher, led by large-cap companies and those in the energy sector, which had been hit hard last week by recession fears. The Dow Jones Industrial Average gained 2.15% to 30’530. The S&P 500 gained 2.45% to 3’764. The Nasdaq Composite rose to 2.51% to 11’069. The energy sector gained around 5% thanks to the surge in oil and natural gas prices.

With the exception of the SMI, which fell slightly by 0.06%, the European stock markets closed higher on Tuesday. The Euro Stoxx 50 rose by 0.70%, the FTSE 100 by 0.42%. This move was achieved despite rising bond yields and inflationary risks. The President of the European Central Bank, Christine Lagarde, confirmed her commitment to fighting rising prices.

Bonds in the US had a quiet day on Tuesday. The US 10-year yield closed at 3.275% on Friday. In Europe, the German 10-year government bond yield moved up to 1.771%. In Switzerland, the yield on the 10-year Swiss government bond recovered to 1.422%.