The Upcoming Swiss PPI

Early tomorrow we have the release of the only major event on the economic calendar for Switzerland this week. Data for the Alpine nation has been coming in line with expectations lately.

But, with the economy just barely in growth territory and subject to broader economic weakness in the European continent, traders are broadly wary of the potential for unexpected negative news. So, if there is a miss with the data here, we could see some volatility in CHF pairs.

Expectations and Timing

The data will be released at 08:30 CET (or 3:30 EST). Expectations are for PPI to have remained flat during February, which would be an increase over the negative 0.7% registered in January.

On a year over year basis, though, producer prices are expected to have fallen 1.0%. This is substantially larger than the 0.5% annualized drop for the prior month.

Last month’s negative result was the first time the monthly index fell below zero since mid-2017. This was just a -0.1% drop. To get a comparable negative result, you have to go all the way back to the end of 2016.

Producer prices peaked last August and have been consistently falling since. Should the predictions come out correct, this would be the first increase in six months.

The Markets

Traditionally, when the PPI number comes out, there is a bit of a move in CHF pairs if the numbers are outside of expectations. The result we see is therefore faded – that is, the pair returns to the mean.

This is partly because PPI is not followed directly as a measure for policy decisions. It is, however, a precursor data point that could indicate potential changes in inflation expectations.

Processing the impact of a PPI number takes a bit of digesting, which includes reviewing other data. That can lead to the market’s overreaction and subsequent correction. However, this doesn’t happen all the time. And it depends on how much of the market has priced in expectations, as well.

The Trends

Switzerland accounts for Producer and Import prices in its index, so it’s a strong indicator of consumer price inflation. Of course, consumers are the biggest component of core inflation, which the SNB follows when it comes to policy decisions.

Increases in producer and import prices usually means that businesses are spending more money on materials to sell to customers. And that means they will raise prices. If the economy is doing well, customers will be able to absorb these prices leading to increases in inflation.

However, if the economy is stressed, then companies can’t roll over the increased costs to their customers. This impacts their profitability, which leads to further economic stress and potential recession.

Nearly 40% of Switzerland’s economy is tied up in trade with its neighbors. Therefore, inflationary pressures in the EU will likely spill into the Alps. But the question is: how much?

With the economy underperforming (or growing below potential) it’s also harder for suppliers and not just retailers to raise prices. Even if the economic situation in Switzerland is doing well, they might be taking advantage of slower rising costs among their neighbors. This lowers producer and import prices.

We have clues for this in the shrinking trade balance, where imports continue to increase while exports are starting to lag. Somewhat ironically, Switzerland’s fastest growing import is jewelry.