Swiss economy expected to return to pre-pandemic levels in the third quarter this year

Last Wednesday, the US Federal Reserve released the minutes of its March FOMC meeting. There were no surprises. The Fed reiterated its desire to see its two objectives fulfilled (i.e. 2% inflation and a return to full employment) before considering a move towards a tighter monetary policy. The institution is prepared to tolerate rising inflation in the short term, and keep its main focus on the evolution of the pandemic, vaccination figures, the circulation of variants and the impact of all of this on the economy. Mary C. Daly, president of the San Francisco Fed, argued that inflation around 2% should not occur for one to two years. A little later in the week, her colleague from Saint-Louis James Bullard was a little more creative in declaring that the Fed could start to consider reducing its asset purchases (currently $120 billion per month) when 75-80% of the population is vaccinated. According to the Center for Disease Control and Prevention (CDC), 36.4% of the American population has received a first dose of vaccine and 22.3% is fully vaccinated.

In terms of inflation, the Consumer Price Index rose slightly more than expected: 0.6% in March from February when the consensus was 0.5%. While the increase is of course linked to the rise in the cost of raw materials, that is not the only factor at play: the core CPI (excluding energy and food) increased by 0.3% against 0.2% expected, which is the largest increase in the last seven months. . In some sectors such as the automotive sector, production is experiencing bottlenecks in the supply chain with shortages of components such as electronic circuits. A rise in production prices has not been fully passed on to consumers, but it is still a factor of inflation.

Looking at the major currencies, we can see the progress of defensive currencies like the yen and the Swiss franc. This goes hand in hand with an increase in geopolitical tensions in Iran, in the China Sea and on the Ukrainian border. Yesterday, Vladimir Putin and Joe Biden spoke by phone for the first time since the latter called Mr Putin a killer. President Biden warned his counterpart that the United States would act firmly in the defence of its interests. He also called for a de-escalation on the Ukrainian border and proposed a summit between the two nations to discuss many issues that are sources of tension. News of the proposal propelled the rouble through its biggest surge in 3 months against the dollar, with investors realising that it effectively removes the spectre of further sanctions in the short term. Oil is also on the rise, driven by Chinese demand and the lack of progress on the Iranian nuclear issue. A barrel of WTI traded at $61, up from $59 a week ago.

Last week the euro-dollar pair traded in low volumes and with very little volatility around $1.19. The pair has been moved within a range between 1.17 and 1.20 since early March and we are currently at the top of that range with the dollar weakening again since yesterday. The CPI did not show an explosion in inflation and as a result the theory of a rapid rise in interest rates is failing. In this context, some analysts are wondering whether the dollar may have risen too much since the start of the year, especially since the lead taken by the United States in vaccination compared to the rest of the world will necessarily end as other countries catch up in the next few months.

In Switzerland, forecasts from the KOF economic research centre indicate that the economy should return to its pre-pandemic level in the third quarter of this year. At 66.3, manufacturing PMI stands close to the all-time high and unemployment continued to drop to 3.4%.

Finally, a look at the performance of the equity markets shows that the main stock market indices are all in the green since the start of the year, 10% for the Dow Jones and the S&P, 8.6% for the Nasdaq, around 11% for the CAC40 and DAX and 4% for the SMI. Earnings season is about to begin and the average earnings of S&P 500 companies are expected to rise 25% (Q1 2021 vs. Q1 2020). Banks in particular could see a semblance of a return to normal with announcements of share buybacks or dividends, which would be made possible by the current and expected rise in Treasury yields.