Treaders point(Sachin)

It is four weeks since the last issue of Weekly Focus, so there is good reason to take a look back at the most important events in the Swiss market over the past month. Macroeconomic data have generally been on the weak side, and a look at how incoming data have compared with consensus expectations (as illustrated by the "surprise index" in the chart below) shows that the market has also generally been disappointed. This was confirmed most recently by an unexpectedly sharp drop in the KOF leading indicator, which fell to 0.90 in July, dragged down by a weak outlook for domestic consumption, whereas the financial sector seems to have stabilised. Besides relatively weak activity data, consumer price inflation in Switzerland remains high, hitting 3.1% y/y in July, the highest rate for almost 15 years. Once again inflation was fuelled by higher prices for energy and other imported goods.
All in all, the data for July confirm our view of the Swiss economy: (i) the economy has peaked and growth is expected to slow significantly; (ii) inflationary pressures have mounted, albeit less markedly than in Euro-land; and (iii) the labour market is still strong but indicating an imminent downturn.
This situation was reflected in the financial markets in July. Swiss yields fell, primarily on instruments with short maturities, and so the yield curve has steepened. The yield spread to Euroland (2Y swap yields) hit a new peak of 198bp the day before the ECB raised its key rate by 25bp on 3 July, but has since narrowed again and is currently at 188bp. This narrowing of the spread is mainly due to the market no longer dis-counting further interest rate hikes from the ECB. The market is, however, pricing in at least one further 25bp hike from the SNB in the next year, with a 28% chance of the SNB raising its target range by 25bp at its September meeting.
Movements in the FX market have been rather surprising. CHF fell 1.5% against EUR in July, sending CHF/DKK down from 4.63 to 4.57, and was second only to the NZD as the worst-performing G10 currency against EUR over the month. This was a surprise, as there were only comparatively small movements in relative yields, whereas there were broad falls in the stock markets. This should have led to a stronger CHF, as historically the CHF has performed when stock markets fall. However, this was not the case in July, which indicates that the negative correlation between CHF and the stock market has weakened recently.