The Swiss Franc (CHF) keeps strengthening - even as the SNB has returned to ZIRP and volatility has declined. This goes against the conventional wisdom and argues something else is going on.

A few points below. CHF typically rallies in "risk-off" environments which is why it's considere a "safe haven". But that isn't the case currently and yet, the currency keeps strengthening.

Given the CHF strength, several people have asked around SNB's future policy and FX intervention. The current situation is between a rock and a hard place.

My two cents as a thread on this topic 🇨🇭 The Swiss franc has surged since the US tariff shock on April 2. CHF is up ~8.2% vs USD and ~3.4% vs EUR. The real effective exchange rate (REER) is now near decade highs. The SNB is watching closely this very closely.

Bond defaults have increased last year. This may level off, but several aspects do suggest quite a bit of macro complacency in credit right now.

A thread 🧵 Some of the default increase has arguably been more of a "normalization" at the index level so far.
In terms of sectoral breakdown, risks remain concentrated in non-cyclical sectors, especially Telecom.

I think the view of the US bond market facing an "Emerging Market" type of risk is remote. That said, it's a thought provoking thread and it's important to keep an open mind.

A few points on the term premium to contextualize the discussion.

https://twitter.com/PauloMacro/status/1709068808806375483

The US term premium has increased/"normalized", though from absurdly low levels.

Excellent and insightful IMF paper with seven stylized facts of 100 different inflation shock episodes across the world.



Key takeways are:imf.org/-/media/Files/… 1. Inflation is persistent, especially after a terms-of-trade shock.

Inflation and liquidity impact stock market performance. Historically, though, the business cycles has been the key determinant for equity returns.

A thread on US equity performance in different economic, inflation and liquidity regimes since the 1950s. 👇 Econ activity > inflation as a driver of equity returns. Using data since 1955, our analysis shows that in all cases, & irrespective of inflation dynamics, returns are positive when an economy is in expansion or recovery mode, and negative when it is in a downturn or contraction

The recent significant increase in longer-dated US government bond yields has raised questions around whether the US could be at risk of government bond crisis.

It's unlikely. A thread. The recent yields increase was driven by a perfect storm of different factors, incl 1) higher UST supply, 2) BoJ YCC tweak, 3) perhaps longer QT, 4) more resilient econ data and 5) slow disinflation. Importantly, global yields have roughly increased in tandem.

How tight is monetary policy? Focusing primarily on the US, with a few high level charts to get the points across. A 🧵 As a disclaimer, many of the charts are taken from a very good report by @darioperkins from @TS_Lombard recently. I'm putting a few additional charts for added context.

Fed funds futures are pricing in about 60bps of rate cuts until the end of the year. Meanwhile, US core CPI is running at 5.5% YoY currently. How is this possible?

When will/can the Fed start cutting rates? Some historical evidence that can serve as a yardstick 👇 First, rate cuts in the immediate future are very unlikely. The inflation backdrop is simply too severe. By year-end, however, the story might look different. Most econometric models as well as market pricing from CPI swaps suggest inflation to be between 3-3.5% by YE.

What a difference 3 years make! Rate normalisation is good news for insurers, as investment income is a key driver of insurers' earnings. But, higher interest rates and less bond market intervention by central banks also means a return to a more "normal" bond volatility regime. The market environment for fixed income is now far more benign than even three years ago. Not only in terms of nominal yields, but especially also in real yields which are really important for long-term oriented investors like insurers.

Hard landing, soft landing, no landing...

A few points around recession risks 👇 Recent data has been quite robust and China reopening as well as a milder European winter have left many analysts more constructive.

https://twitter.com/patrick_saner/status/1612709118023794688

Lot's of discussions on Fintwit around SNB's use of the USD swap line with the Fed.

Here a quick thread to explain this, but without the Fintwit conspiracy theories 😉 As @JeffSnider_AIP showed, banks in Switzerland started borrowing USD from SNB last month. SNB raises these dollars from the Fed through the USD swap lines that these two (and other) central banks have. This week roughly 6bn were borrowed, last week roughly 3bn.

Decaying intervention effects.

Some short thoughts on the policy interventions in JPY and Gilts. Chart above shows the Yen and 10y Gilts before and after recent market interventions. Both JPY and 10y gilts have shown some relief after intervention (as expected), but both at are now either higher than when the intervention happened (Yen) or creeping back to the highs (Gilts)

After the equity sell-off of the past weeks, many are asking at what equity level the "central bank put" comes back into play. S&P 500 at 3500? 3000? It's the wrong question to ask.

A thread on the central bank put in a new regime 👇 The central bank "put" – loosely defined as financial markets' or an economy's reliance on a central bank as a lender of last resort in providing insurance against very adverse financial market and/or economic outcomes - has changed.

The US housing market is very important for the economy, but currently also for inflation via the shelter and OER component. A few thoughts below 👇 First things first and as disclaimer: I am using several charts and analysis by @GoldmanSachs which had a great report out on this topic today. Anyway, here goes:

Grüezi! 🇨🇭
Swiss National Bank Governor Jordan held an excellent speech at Jackson Hole. His tone was unmistakably hawkish, but there were a lot of important other points worth highlighting. A quick thread 👇 Point 1: On monetary policy, Jordan was hawkish. He hammered the point that "ensuring price stability must be our absolute priority". Absolute - a word purposefully chosen.

Financial conditions needs to tighten more to reign in inflation. Perhaps counterintuitively, though, the ongoing risk asset relief rally is actually good for the Fed. A few thoughts around what financial conditions are and the current state of play 👇 Financial conditions indices (FCI) measure how accommodative or tight overall conditions for an economy are. They provide clues as to how adequate the monetary policy setting for an economy is. There are many providers of FCI – usually similar concepts but different methodologies