Thomas Jordan, president of the Swiss National Bank (SNB), surprised investors last week by saying that his institution could lower its discount rate further. While emphasising the effectiveness of the SNB’s negative interest rate policy, which it is pursuing concurrently with interventions in the forex market in a successful bid to prevent the Swiss franc from appreciating sharply, Jordan stated that the lower limit for the discount rate had not been reached. Thus, despite an improvement in Switzerland’s trade balance (which showed a surplus of CHF 4.37 billion in September, the highest level since 1987), he confirmed that the SNB would not hesitate to lower its key rate further to prevent the franc moving up.
While Jordan’s statement should not be underestimated, we see it as an attempt to talk the franc out of its recent upside movement against the euro and not as a change of outlook for Swiss monetary policy (see left-hand chart ). We maintain our projection of an unchanged discount rate, at -0.75%, for end-2017. The SNB will probably pursue its interventions in the forex market instead (see right-hand chart). Our faith in this forecast was strengthened on 25 October when the SNB’s vice-president, Fritz Zurbrügg, commented that there was no upper limit on the size of the central bank’s balance sheet. The EUR/CHF exchange rate should stay flat at around 1.08 in 2017.
In the Eurozone, the outlook improved in October for manufacturing as well as services, with the composite PMI rising to 53.7 points from 52.6 in September. While this increase was mainly fuelled by Germany, the surveys of purchasing managers also show that sales prices jumped at a rate not seen in five years. Moreover the most forward-looking leading subindices, order intake and employment, suggest that this positive momentum could continue in November.
However, we do not expect economic growth in the Eurozone to gain pace longer term as lending is still not picking up. Loans to non-financial companies grew by just 1.9% in September, for the third consecutive month, and credit to households has been growing by only 1.8% for four months now (see left-hand chart). This strengthens our belief that the ECB will maintain its quantitative easing programme beyond March 2017.
In the US, the first estimate of third-quarter growth in Gross Domestic Product (GDP) added weight to our view—shared by 72.0% of the market—that the Federal Reserve will raise interest rates in December. The pace of growth surged to 2.9% in annualised terms. The trade balance contributed heavily to this jump, chiefly thanks to massive soybean exports to South America where crops were decimated by drought. Moreover, after drawing down inventories for five quarters in a row, US companies started rebuilding them to keep up with the recent rise in new orders (see right-hand chart).