Swiss stocks managed to close higher on Tuesday, even as a hotter-than-expected US inflation reading rattled global markets and pushed expectations for Federal Reserve policy in a more hawkish direction. The Swiss Market Index (SMI), which tracks the country's largest listed companies, finished the session up 0.61%.
The move came against a backdrop of mixed signals: new data from the KOF Swiss Economic Institute pointed to a cooling global economy, while US consumer prices rose more than forecast, prompting investors to reassess how quickly the Fed might cut interest rates next year.
KOF barometers point to softer momentum
The KOF Swiss Economic Institute, a research group based at ETH Zurich, released its latest global economic readings on Tuesday. Its coincident global barometer, which tracks the current state of the global economy, slipped 1.4 points to 101.6 in November. The leading global barometer, which looks ahead, fell 1.7 points to 105.5.
KOF's director described the decline as a loss of momentum rather than a clear downturn. That nuance matters: the readings remain above the 100 threshold that separates growth from contraction, suggesting the global economy is still expanding, just at a slower pace than before.
For Swiss investors, the KOF data is a useful gauge of external demand, since Switzerland is a highly export-oriented economy. A softening global outlook can weigh on Swiss multinationals, but the fact that the barometers are still in positive territory helped keep sentiment from souring.
US inflation comes in hot
On the other side of the Atlantic, US consumer prices rose 0.4% month-on-month in October, according to the Labor Department. That was a tenth of a percentage point above what economists had expected, and the same was true for the core measure, which strips out volatile food and energy prices.
ING, a Dutch bank, noted that both headline and core inflation came in above forecasts. That kind of surprise tends to make investors rethink how many interest-rate cuts they can expect from the Federal Reserve in the coming months. Higher inflation usually means the central bank has less reason to ease policy, and may even need to keep rates elevated for longer.
The inflation data landed just as Fed Governor Chris Waller signaled support for a 25-basis-point rate hike at the December meeting, and did not rule out a larger 50-basis-point move. A basis point is one-hundredth of a percentage point. Waller's comments, combined with the hot CPI print, pushed US Treasury yields higher: the 2-year yield rose 13 basis points and the 10-year yield climbed 6 basis points.
By the end of the day, markets had fully priced in a 25-basis-point hike for December, meaning investors now see that move as all but certain. The prospect of a more aggressive Fed has ripple effects around the world, as seen in rising eurozone bond yields and a firmer US dollar.
Why Swiss stocks held up
At first glance, higher US short-term yields are usually bad news for equities. They lift the "discount rate" investors use to value future profits, which makes stocks look less attractive relative to bonds. That dynamic often hits growth-heavy sectors hardest.
But for Switzerland, there's a second, more subtle effect at play. When the gap between US and Swiss interest rates widens, it becomes more expensive for Swiss franc-based institutions to hedge US dollar exposure back into francs using currency forwards. That can make the returns on hedged US assets look a bit less appealing, at the margin.
As a result, CHF-denominated assets like SMI stocks can end up relatively better supported on days when US yields jump. That's part of the reason the Swiss index managed to close in positive territory despite the hawkish repricing across the Atlantic.
The resilience of Swiss equities is also a reminder that not all markets move in lockstep with US rate expectations. US stocks were rattled by the inflation data, but Swiss investors had their own set of signals to weigh, including the KOF readings and the relative appeal of franc-based assets.
What it means for investors
For everyday investors, the key takeaway is that a fully priced 25-basis-point December hike can still nudge flows toward Swiss stocks. When the market has already priced in a move, the surprise factor is diminished, and other factors—like currency dynamics—can take over.
That doesn't mean Swiss equities are immune to global rate pressures. If US inflation continues to run hot, the Fed could be forced to keep rates higher for longer, which would likely weigh on global growth and corporate earnings. But for now, the combination of cooling global momentum and a hawkish Fed has created a mixed picture that has, at least for one day, favored Swiss blue-chips.
Investors should also keep an eye on how the rate differential evolves. If the Fed hikes in December and signals more to come, the franc could strengthen against the dollar, which would be a headwind for Swiss exporters. Conversely, if inflation cools and the Fed pivots to cuts, the pressure on hedged US assets would ease, potentially reducing the relative appeal of Swiss stocks.
As always, it's important to remember that market moves like this are just one day's data point. The broader trend will depend on whether inflation continues to surprise to the upside, and how central banks around the world respond.
