The Federal Council withdraws from the discussions on the framework agreement with Europe

The US economy grew at an annualised 6.4% in the first quarter. Weekly unemployment claims are at their lowest since March of last year after dropping to 406,000 from 444,000 the week before. Redundancies are also falling and many companies are actually struggling to hire and keep up with the high demand brought on by the rapidly reopening economy. This is despite ten million registered unemployed in the country. Many Republican state governors have announced that they will end as early as next month a federal programme that provides for weekly $300 payments. Their argument is that such aids are keeping people from going back to work, even though this is not what the facts show. It is not a purely economic matter, it is political as well.

President Joe Bide has proposed a $6 trillion budget by which he aims to “reinvent” the US economy. His priorities are in line with his campaign promises: education, health and infrastructure. These were not the priorities of the last president. Mr Biden also wants Congress to pass two major long-term investment plans: the first, dedicated to families, will cost $1.8 trillion over 10 years. The second, dedicated to infrastructure, will cost $1.7 trillion over 8 years. These expenses will considerably increase US debt. But Mr Biden contends that they are necessary to bring back jobs, take on China on the international stage and fight against climate change. His Republican opponents do not agree with the amounts, which they deem too high, nor with the budgetary guidelines – much less with how the plan will be funded. To achieve his goals, Mr Biden intends to hike takes on the richest Americans and big companies. Given the very slim majority Democrats hold in Congress, negotiations promise to be tight.

Treasury Secretary Janet Yellen continues to repeat that the inflation currently worrying the markets is temporary. Asked about the US budget, she noted that the debt-to-GDP ratio will inevitably increase beyond 100%, but preferred to focus on the fact that the country still has room to make debt payments, and that the real cost of the debt is actually negative in light of 2% inflation and a 1.6% long-term interest rate.

Moving on to Switzerland:  As restrictions were further eased this week, the KOF economic barometer broke its own record for the second time in a row, settling at 143.2 points. The increase benefits the entire manufacturing and service sector. Foreign trade, which shows a large surplus, is still doing well and, according to the OECD, GDP should grow by 3.2% in 2021 and 2.9% in 2022. On the political front, after seven years of fruitless negotiations with the European Union, the Federal Council withdrew from talks on the framework agreement as it considered the positions were too distant. The relationship with the EU will have to take on a new direction, but how? Uncertainty is in order, but on the foreign exchange market the Swiss franc did not react to this announcement and has remained in the 1.09–1.11 band since the end of February. This is still above the level of a year ago (1.0514 at its lowest on May 14, 2020). The vice chairman of the SNB has welcomed the recent decline in the Swiss franc, which he believes is due to the improvement in the global economic situation and to the stimulus plans which are restoring confidence and making safe havens less attractive. He nevertheless considers that the franc remains overvalued and that the SNB’s interventions on the currency market are justified to protect the Swiss economy.

As for other currencies, stability is essential but the yuan and the pound sterling continue to be sought after. Against the dollar, the Chinese currency, driven by global demand, beats its level of June 2018 and the UK currency is at its highest since March of the same year. The Turkish lira continues to lose value (the USD/TRY now stands at 8.63) after president Erdogan again pressured for lower interest rates from the central bank. Gold is trying to stay around $1,900 dollars an ounce and oil is still up at $68 a barrel. Yesterday, the OPEC chose not to significantly increase production and to stick to the gradual easing of production cuts decided in April. The complicated and controversial subject of Iran’s possible return to the world stage has been postponed.