SNB to cut rates by 25bp today, but it's a close call

In focus today

Today, we expect the SNB to cut policy rates by 25bp to 1.00%, but stress that it is a close call between 25bp and 50bp as inflation has underperformed the SNB's forecast, the real trade-weighted CHF has appreciated notably, and GDP has been higher than expected. Jordan has previously stated that the neutral nominal rate is around 1.00% and we think they will be satisfied with a more gradual pace rather than going directly to below the neutral nominal rate.

In the US, we have speeches from both Powell (15.20 CET), Williams, and Kashkari while in the euro area Lagarde is scheduled to speak at 15.30 CET.

Overnight, in Japan the ruling Liberal Democratic Party will elect a new leader and thus PM. With the recent hawkish turn from the BoJ looking highly politically influenced, markets should find this election interesting. Abenomics loyalists preferring a slow normalisation of monetary policies as well as hawks are on the ticket in an election that will be heavily influenced by behind-the-scenes arm wrestling among party heavyweights.

We also get Tokyo inflation data overnight for September, a good indicator of countrywide data released in three weeks.

China releases industrial profit growth overnight, which has been running around 4% in recent months below the long-term average of 8%. With growth struggling in August, we expect to see a move lower in profit growth.

Economic and market news

In geopolitics, while Israeli airstrikes on Hizbollah in Lebanon have continued throughout the week, yesterday the US and several G7 allies publicly called for a 21-day ceasefire to prevent an escalation to all-out war.

The Riksbank cut the policy rate by 25bp as widely expected. The guidance delivered was to the dovish side which caused markets to raise pricing to 48bp of cuts in November (prev. 37bp), but otherwise the market reaction was muted.

Equities: Global equities were lower yesterday, displaying notable sectoral and regional differences. Cyclical sectors such as technology and materials, along with utilities, outperformed even as the long end of the yield curve moved higher in the US and gold prices increased. This combination is rare and difficult to explain solely from a top-down perspective. A key factor was the Chinese stimulus bonanza, which continues today with discussions about an exceptional liquidity injection into banks. This stimulus has propelled Chinese stocks higher again today, steering them toward their best week in a long stretch. We are also observing side effects in other Asian markets this morning, notably with Japanese indices surging by more than 2%. In the US yesterday, the market movements were as follows: Dow -0.7%, S&P 500 -0.2%, Nasdaq +0.04%, and Russell 2000 -1.2%.

FI: With no major macro news out, EGB rates rose through yesterday's session, as markets moderated ECB rate cut expectations for next year. The Bund curve was 2-3bp higher across tenors, while peripherals saw some widening. The persistent uncertainty on the French budget outlook pushed long-end OAT yields up by 5bp, as PM Barnier's new government warned that the deficit could exceed 6% of GDP next year. The Bund ASW-spread tightened through the session, now trading just below 30bp. Risk sentiment is strengthening this morning due to rumours of an additional USD 142bn injection from Chinese authorities into the banking system.

FX: The USD rallied in the US session as EUR/USD dropped from above 1.12 to the lower end of the 1.11-1.12 range. USD/JPY has closed in on 145. In Scandies, both USD/NOK and EUR/NOK made huge leaps. The latter now trades in the higher end of the 11.70-11.80 range. USD/SEK seemed prepared to go for a test of 10.00, but instead the broad dollar rally sent the cross closer to 10.20. Today's big G10 FX event is the SNB rate decision. We look for a 25bp cut with a dovish tilt, while the market is priced at 35bp.