Swiss deflation paves way for rate cut in June: Wells Fargo

Swiss inflation dipped to -0.1% year-over-year in May, the first deflationary reading since March 2021, reinforcing expectations for a 25 bps rate cut by the Swiss National Bank (SNB) at its June 19 meeting, according to Wells Fargo. While markets have priced in more than a 100% probability of a June cut, and anticipate cumulative rate reductions of over 50 bps this year, resilient Swiss Q1 GDP growth of 2.0% year-over-year may limit further easing beyond June, with Wells Fargo not expecting the SNB to take its policy rate into negative territory.

Analysis

Switzerland experienced a notable shift in its inflationary landscape in May, with headline CPI declining by 0.1% year-over-year, marking the first instance of deflation since March 2021. This development, in line with consensus expectations, is considerably strengthening the case for the Swiss National Bank (SNB) to implement a 25 basis point policy rate cut at its upcoming June 19 meeting, a move Wells Fargo anticipates will bring the policy rate to 0.00%. Supporting this disinflationary trend, core inflation slowed to 0.5%, domestic inflation to 0.6%, and services inflation to 1.1%, although these figures do not yet indicate a full transition to underlying deflation. Market sentiment strongly reflects this expectation, with participants pricing in more than a 100% probability of a June cut and forecasting cumulative rate reductions exceeding 50 bps for the year. However, Switzerland's economic resilience presents a potential limiting factor for further aggressive easing. The economy demonstrated robust performance in Q1, with GDP expanding 0.5% quarter-on-quarter (0.8% adjusted for sporting events) and 2.0% year-over-year, surpassing forecasts. This growth was partly fueled by a 10.5% surge in exports, potentially ahead of anticipated U.S. tariffs, though offset by a 13.1% rise in imports. Sentiment indicators offer a mixed yet firm picture: the KOF leading indicator stood at 98.5 in May, consistent with 1.5% annual growth, while the manufacturing PMI contracted to 42.1, contrasting with an expansionary services PMI of 56.3. Wells Fargo projects continued economic growth around a 1.5% pace but acknowledges downside risks from potential U.S. tariffs. Consequently, despite the soft inflation and a dovish ECB stance, the scope for SNB rate cuts beyond June appears limited, with further easing likely contingent on definitive evidence of underlying deflation and a significant economic slowdown toward stagnation.

Key Decisions for Investors

• Investors should factor in a high probability of a 25 basis point rate cut by the SNB on June 19, which is largely priced into markets and could influence Swiss Franc valuations.
• Monitor Swiss economic indicators, particularly future inflation components, GDP growth, and PMI data, as sustained economic resilience may limit SNB easing beyond the anticipated June cut, contrary to current market pricing for over 50 bps of cuts this year.
• Consider the potential impact of U.S. tariffs on Swiss export-oriented sectors and overall economic growth, as this represents a key downside risk to the current outlook.
• Evaluate positions in Swiss assets with the understanding that while a June cut is expected, the SNB may be hesitant to push policy rates into negative territory without a more severe economic downturn or entrenched deflation.