Swiss CPI prints higher
(Arnaud Masset, market analyst)
The Swiss consumer price index came in slightly above median forecasts in January as it remained unchanged while economists were expecting a contraction of 0.1%m/m. On a year-over-year basis, the headline gauge rose 0.3%y/y - matching expectations - compared to a flat reading in December. Looking at the HICP gauge, (Harmonised Index of Consumer Prices, which enables a comparison of CPI measures across EU countries) inflation also rose 0.3%y/y in January, while on a month-over-month basis, it contracted 0.2%. Despite the drop in clothing and footwear prices at the end of the Christmas sales period, the big picture did not change much during the first month of the year. EUR/CHF traded sideways at around 1.0660 amid the release. Even the rejection of the corporate tax reform on Sunday did not allow the CHF to weaken, suggesting that investors are willing to put up with more bad news from Switzerland. Indeed, in spite of the sharp rally in the equity market, the geopolitical environment, on both side of the Atlantic, has never been so uncertain. This uncertainty is encouraging international investors to keep part of their investments in safe haven assets. The Swiss franc is not the only asset enjoying this situation. Gold has risen more than 7.5% since 1st January. Given the current environment, we see no justification for a change in the current dynamic as the European political calendar, together with Trump's first 100 days, remain the main challenges of the year.
German & Eurozone ZEW should provide optimism
(Yann Quelenn, market analyst)
The biggest source of fear this year for financial markets is Europe's political uncertainties. Eurozone and German ZEW sentiment indicators will be released today. In particular, when it comes to Germany, markets are still anxious to get a sense of what is happening. The underlying difficulties of the Euro area should be reflected in the survey. For example, it is clear that the European elections (French, German and Dutch) should add significant downside pressures to economist sentiment, which from our vantage point should remain mixed.
However, this indicator does not fully reflect the underlying robustness of the largest European economy. The German 10Y is still on the rise since the start of the year - yielding around 0.33%. The deflation risk seems to be slowly fading and the annual Eurozone Core CPI is on the rise (0.9% y/y) and is now at its highest level in two years. Moreover, the ECB's objective of 1.7% in 2019 looks attainable and it seems that we are at a turnaround in terms of monetary policy.
Currency wise, the major driver for the euro is the political uncertainty and this definitely helps the ECB as it adds upside pressures on inflation and as result on growth. Our view is mixed on the single currency as there is a major risk of depreciation due to the continued rise of nationalist parties despite better economic data.