The Eurozone and Swiss economies are undergoing a rapid transformation, with inflation coming down fast and manufacturing activity weakening, shifting monetary policy expectations. Core inflation, a critical figure for economists, is closely monitored by central banks tasked with maintaining manageable inflation levels, typically around 2%. Recent data reveals that the Eurozone’s HCOB Manufacturing Purchasing Managers’ Index (PMI) confirmed modest growth, while Switzerland’s PMI indicates a slight easing of contraction, despite ongoing challenges from US tariffs and weak external demand.
Core Inflation and Monetary Policy
Core inflation has been a go-to measure for central banks on when to hike interest rates. Typically, when core Consumer Price Index (CPI) inflation is greater than 2%, monetary authorities respond quickly. If inflation increases, they almost always move to raise interest rates in response. Every time core CPI dips under 2% we start hearing calls for a rate cut. This connection emphasizes why core inflation should continue to serve as the lodestar for monetary policy deliberations.
Central banks are generally given strong independence and clear mandates to control inflation in order to foster necessary conditions for economic growth. The 2% target rate is an important benchmark point, helping to inform policymakers as they set interest rates to control inflation. Because of this, changes in core inflation can have a major impact on market expectations about future changes in monetary policy.
Eurozone Manufacturing Shows Signs of Recovery
According to new reports out of the Eurozone, it seems that there has been a turnaround in manufacturing conditions. The preliminary October HCOB Manufacturing PMI was confirmed this morning at 50, up from 49.8 the month prior. This development is an encouraging indicator of a nationwide return to relatively modest growth across the factory sector. It provides a ray of hope even as elevated levels of economic uncertainty persist.
Friday’s positive surprise in the Eurozone’s manufacturing sector is a welcome harbinger of an improving pace of economic activity. A PMI index value greater than 50 represents expansion, while values below this index measure threshold mark contraction. For the first time in a while, manufacturers are indicating they’re starting to bounce back from recent downturns. This recent rise adds to a positive picture for the economic horizon.
Swiss PMI Beats Expectations Amid External Pressures
Over in Switzerland, the manufacturing sector joined in on the act with an uptick in October. SVME PMI increased to 48.2, beating an expectation of 47.5 and a large jump above the September reading of 46.3. This slight uptick is a sign that the Swiss manufacturing sector is beginning to calm its slowdown. That said, it’s still well below the neutral level of 50.
Troubles remain for the Swiss economy. US tariffs and weak external demand continue to weigh heavily on the sector, complicating these recovery efforts. Yet manufacturers are still confronted with considerable headwinds that threaten to suppress growth, highlighting the necessity for continued targeted support to help them weather these outside forces.
Future Monetary Policy Expectations
The Swiss National Bank (SNB) held its policy rate at 0.00%, a record low, in its September meeting. Market participants are increasingly speculating about the potential for rate cuts in the near future. Today’s swaps pricing puts a 70% chance that the next move is a 25-basis-point cut to -0.25% in the next twelve months.
Weaker-than-expected economic data has stoked a fire of expectation for a prememptive rate cut. Soaring core inflation figures and signs of weakness in manufacturing activity are behind the pivot. Central banks have flush with cash. Central banks are in a rush to rethink their playbooks as economic realities change. This means that they will be raising interest rates before long.