You Won't Believe How Global Central Banks Responded To The Feds Rate Cuts

Summary

The transcript discusses a wave of rate cuts by global central banks, triggered by concerns of 'undershooting' inflation, a term that reflects recessionary conditions. Central banks, including those in Switzerland, Canada, and potentially Europe, are expected to cut rates to counter falling consumer prices and weakening economies. The Federal Reserve's recent cut has sparked similar moves worldwide, though some, like the Bank of England, remain cautious. The risks of disinflation and a worsening labor market are driving these decisions, with concerns that further economic slowdown could lead to negative growth and inflation.

Takeaways

• 📉 The Federal Reserve recently cut interest rates by 50 basis points, triggering a potential wave of similar cuts from other central banks.
• 🇨🇭 The Swiss National Bank is expected to consider cutting interest rates due to reduced inflation forecasts, likely to undershoot targets.
• 🇪🇺 The European Central Bank may cut rates in October instead of waiting until December, as inflation and growth fall short of expectations.
• 💼 Undershooting, a term used to describe recession conditions, is becoming a key theme as consumer price growth remains below central bank targets.
• 🏦 The Bank of Canada is also likely to cut rates by 50 basis points, with central bankers increasingly concerned about inflation risks.
• 💼 Labor market weakness is a major concern, with companies like Intel announcing layoffs and scaling back investment plans, particularly in Europe.
• 🛑 The risk of disinflation (or even deflation) is rising, which could lead to negative growth in the global economy, especially in Europe.
• 📊 Financial markets have been pricing in these economic risks for some time, and central bankers are starting to act on these concerns.
• 🇩🇪 Germany is facing a potential recession, with the ZEW economic sentiment index for Europe and Germany dropping significantly in recent months.
• ⚠️ Central banks worldwide are scrambling to address weakening economic conditions, with accelerated rate cuts becoming more common.

Q & A

What is the primary economic concern driving central banks to cut interest rates globally?

The primary concern is 'undershooting,' a term used to describe when consumer price growth rates fall below central bank targets, often signaling recessionary conditions.

Why are central banks in Switzerland and Canada considering large interest rate cuts?

Both the Swiss National Bank and Bank of Canada are considering large rate cuts due to the risk of consumer prices falling below their targets, driven by global economic weakness, particularly in Europe.

How has the risk of undershooting inflation impacted the European labor market?

In Europe, the risk of undershooting inflation is tied to weakening labor market dynamics, such as a lack of hiring and rising unemployment, despite relatively stable unemployment rates.

What recent indicators suggest the German economy is weakening further?

Indicators such as the sharp decline in the ZEW sentiment index, Intel's postponement of a major factory investment, and predictions of a potential recession by the Bundesbank all point to further economic weakening in Germany.

What are the ZEW sentiment index and current conditions index telling us about the European economy?

The ZEW sentiment index has dropped significantly, indicating a sharp decline in economic confidence, while the current conditions index for Germany is at its lowest since May 2020, reflecting weak economic conditions.

How has the Federal Reserve's recent actions influenced other central banks' decisions?

The Federal Reserve's recent rate cut has relieved pressure on other central banks, allowing them to follow suit with their own rate cuts in response to economic weaknesses without taking the lead.

Why is the Bank of England an outlier among central banks concerning interest rate cuts?

The Bank of England has opted to hold rates, citing relative stability in the UK economy and disinflationary trends, making it less eager to cut rates compared to other central banks.

What economic factors are driving Intel's decision to delay its investment in Germany?

Intel's decision to delay its factory investment in Germany is driven by weakening economic conditions, labor market concerns, and broader global economic uncertainty.

Why are central banks worried about 'too much disinflation'?

'Too much disinflation' refers to consumer prices falling too far below central bank targets, potentially leading to recessionary conditions, weakening labor markets, and negative inflation (deflation).

How has market sentiment influenced central bank actions in recent months?

Markets, particularly through bond yields and swap pricing, have been ahead of central banks in predicting economic weakness. Central banks are now acting more decisively based on these market signals, which point to undershooting inflation and economic downturns.

Outlines

00:00

📉 Global Central Banks Respond to Economic Weakness

The Federal Reserve's recent rate cut by 50 basis points has sparked discussions among other central banks, including the Swiss National Bank and European Central Bank (ECB), about following suit. Emerging concerns center around 'undershooting'—a term used to describe recession conditions, particularly related to falling consumer prices. This economic downturn is visible in shrinking growth rates and increasing cost pressures on companies, leading to potential layoffs. Intel, for example, has postponed a major investment in Germany, while the ZEW indicator for Europe and Germany has sharply declined.

05:01

🔍 Focus on Inflation Undershooting and Global Weakness

The possibility of undershooting inflation targets in Switzerland and Canada has become a key concern, leading to discussions of potential 50 basis point rate cuts. Swiss officials have revised inflation forecasts downwards, with further reductions expected due to global weakness, particularly in Europe. Canada's central bank faces internal debates over inflationary risks, but the overall trend leans toward more aggressive rate cuts to address economic softness. This contrasts with the Bank of England, which is holding rates steady due to perceived stability in its economy.

10:01

⚠️ European Central Bank Weighs October Rate Cuts Amid Labor Market Woes

The European Central Bank (ECB) is re-evaluating its rate-cut timeline, with some officials advocating for action in October instead of waiting until December. Labor market concerns are a key driver of this urgency, as weak hiring and rising unemployment signal broader economic troubles. ECB policymakers are increasingly worried about undershooting inflation targets and how this could spiral into more significant economic problems, similar to what occurred in the 2010s.

15:03

📊 German Economic Outlook Worsens as Recession Deepens

Germany's economy shows clear signs of further recession, with the Bundesbank and ZEW sentiment indicators pointing to worsening conditions. New vacancies have plummeted, layoffs may be starting, and the contraction in GDP could continue into the third quarter. Major corporations like Intel have already paused large-scale investments, citing economic uncertainty. These developments highlight broader risks of undershooting inflation targets and underline the need for central banks to act quickly in response to weakening economic fundamentals across Europe.

🏭 Industry Retrenchment and Growing Fears of Recession

Intel’s decision to delay its chip factory construction in Germany underscores the deepening labor market weakness and growing fears of recession. Companies are scaling back or halting hiring, further exacerbating economic conditions. This trend of retrenchment aligns with central bankers' concerns about undershooting inflation and the potential for prolonged recession. The global economy, especially in Europe and Germany, faces serious challenges as both consumer and business confidence erode.

Keywords

💡Undershooting

Undershooting refers to the phenomenon where inflation rates or economic growth fall below central banks' targets. In the video, it is used to describe recession-like conditions where consumer prices stop rising or even fall, leading to broader economic weakness. This concept is central to the narrative, as it explains why central banks are cutting interest rates to counteract this trend.

💡Central Bank

A central bank is a national financial institution responsible for managing a country's currency, money supply, and interest rates. In the video, various central banks (Federal Reserve, ECB, Swiss National Bank) are highlighted for their responses to economic conditions by adjusting interest rates to combat inflation or prevent undershooting.

💡Rate Cut

A rate cut refers to the lowering of interest rates by a central bank to stimulate the economy. In the video, multiple central banks are discussed as they contemplate cutting rates to avoid economic slowdown and undershooting, with examples such as the Federal Reserve, the Bank of Canada, and the Swiss National Bank.

💡Disinflation

Disinflation is the slowing down of inflation, where price levels continue to rise but at a slower rate. The video discusses how central banks are concerned about disinflation turning into undershooting, as disinflation can indicate a weakening economy, particularly in labor markets and consumer spending.

💡Consumer Prices

Consumer prices represent the average prices of goods and services purchased by households. In the video, the falling consumer prices are a major concern, as they signal economic weakness. The Swiss National Bank, for instance, is expected to cut rates due to forecasted reductions in consumer price inflation.

💡Recession

A recession is a period of economic decline typically characterized by reduced industrial activity, decreased consumer spending, and rising unemployment. In the video, recession conditions are implied by the term 'undershooting,' where weak economic growth and falling prices lead to central bank interventions.

💡Federal Reserve

The Federal Reserve (or the Fed) is the central banking system of the United States. The video discusses the Fed's decision to cut rates by 50 basis points, triggering similar actions by other central banks. This move is part of a broader effort to counteract economic weakening and the risk of undershooting inflation targets.

💡Labor Market

The labor market refers to the supply and demand for labor, where employees provide the supply and employers the demand. In the video, central banks are concerned that weakening labor markets will lead to lower consumer prices, exacerbating undershooting. Examples include Intel's layoffs and hiring freezes as signs of a slowing labor market.

💡Inflation Target

An inflation target is a central bank's goal to maintain inflation at a certain level, usually around 2%. The video discusses how inflation targets are at risk of undershooting, leading central banks to consider rate cuts. In Switzerland, for example, the government’s inflation forecast is revised downward, raising concerns over the economy.

💡ECB (European Central Bank)

The ECB is the central bank for the Eurozone, responsible for monetary policy across member states. In the video, the ECB is deliberating whether to cut rates again in October to prevent further economic decline. The bank’s actions are being closely watched, especially in relation to undershooting inflation targets.

Highlights

Federal Reserve cut rates by 50 basis points, leading to suggestions that other central banks, such as the Swiss National Bank and European Central Bank, may follow suit.

Emerging theme of 'undershooting' describes weak economic conditions leading to inflation rates falling below central bank targets, a concern across several countries.

Undershooting indicates weak consumer prices and could result in companies facing cost pressures, leading to layoffs as seen with Intel canceling a €30 billion investment in Germany.

The German Central Bank expects a recession, though not a severe one yet, with further economic declines predicted.

Swiss authorities are discussing a 50 basis point rate cut due to drastic reductions in inflation forecasts for 2024, mainly attributed to global economic weakness.

Bank of England stands as an outlier, choosing not to cut rates in its latest meeting, citing relatively stable disinflationary conditions.

The Bank of Canada, among the first to cut rates, is seeing internal division about inflation risks, with some policymakers still concerned about future inflation.

Global financial markets are ahead of central banks, pricing in rate cuts and economic weakness before official actions are taken.

There is growing risk that inflation in the US, Switzerland, and other global economies will continue to undershoot targets due to weakening labor markets and reduced consumer demand.

The European Central Bank may accelerate rate cuts due to a deteriorating economic situation, with officials suggesting that the next move might occur in October rather than December.

European labor market data shows a concerning drop in hiring, with vacancies down 20% and job losses rising by 8%, raising fears of deepening economic stagnation.

Recent ZEW sentiment indices for Europe and Germany have collapsed, with the sentiment index for Europe dropping over 40 points in three months, signaling increasing economic pessimism.

Germany’s economic situation is worsening, with the Bundesbank predicting no rebound in the second half of the year, reinforcing the risk of recession.

Central banks are increasingly acting on recession fears, with the focus shifting from inflation concerns to preventing excessive economic decline and 'too much disinflation.'

Global companies like Volkswagen and Intel are delaying or canceling major investments, further contributing to labor market and economic weakness across Europe.

Transcripts

after the Federal Reserve cut rates by

5050 basis points yesterday now there

are suggestions that the Swiss might do

the same at their meeting next week then

there are officials at the European

Central Bank who are suggesting the ECB

might cut rates again in October rather

than waiting for December as had been

suggested just a couple weeks ago the

emerging theme which is driving this

rate cut wave sweeping over global

authorities is in a word under shooting

unders shooting is a fancy term for

recession conditions but put in the

context of consumer prices the term

refers to growth rates in cpis that fall

below Central Bank targets as they had

during the entire decade of the 2010s

imagine that now officials around the

world are starting to worry about

exactly what bonds have been pricing all

along and just a reminder I mentioned

last week the Bull's steepening in

Europe too now under shooting sounds

good but it happens when an economy is

so weak prices stop Rising entirely and

they may even contract and that means

cost pressures on companies who then

stop hiring workers sound familiar and

if it goes too far then there are

layoffs that's just what Intel announced

along with scrapping plans although

technically they're on hold for what

would have been a gigantic investment in

Germany 30 billion euros worth

generating three 3,000 high-paying jobs

the German Central Bank just so happened

to announce today that it expects a

recession not a big one at least not yet

but things aren't improving over there

as they had been expected to again under

shooting underscoring the huge risk the

influential zew for Germany as well as

Europe has absolutely crashed over the

past three months up to and including

September and bringing this all back to

the Swiss the primary reason the Swiss

are talking about a 50 basis point Ray

cut is a drastic reduction in the

forecast for Consumer prices next year

under shooting and they primarily blame

weakness around the rest of the world

including and starting from Europe again

the theme Here is under shooting

consumer prices that go too low because

the economy is much weaker than expected

this rebound that everyone had been

talking about it's not happening quite

the contrary things are going in the

wrong directions and central banks are

trying desperately to catch up not all

central banks are doing so we should

point out that there are a couple

outliers out there including the bank of

England which just this week said it was

on hold this time because they didn't

want to be either perceived or actually

be in a hurry to cut rates they think

the situation in the English economy is

relatively stable disinflationary things

don't look too bad that's the one

outlier among all the major other

central banks that are moving more

decisively to do something about the

prospects for undershooting Consumer

prices one one of those that went first

in the rate cut cycle that's the Bank of

Canada and the Bank of Canada like any

other Central Bank has its inflation

holdouts and there was a note from just

recently which suggested the the

committee is more divided than they let

on there are certain faction as there

always will be of of policy makers who

will continue to believe that inflation

is around the next corner so there

always going to be policy makers out

there who still believe in inflation

there're always going to be central

banks that

more optimistic than the rest but by and

large the tide has absolutely turned

going back to Canada quote traders in

overnight swaps have upped their bets

for a larger than normal reduction at

the next meeting October 23rd markets

placed the odds of a 50 basis point cut

at about 2third on Wednesday this past

Wednesday after the Federal Reserve

lowered its Benchmark interest rate by

half a percentage Point again this rate

cut uh Euphoria wave is sweeping through

central banks because now the FED has

taken all the Heat and all the pressure

off other central banks can now do what

it is they really want to do which is do

something or at least appear to do

something about this potential for

undershooting inflation which is a

catchall for weakness in the economy

especially the labor market because they

believe Philips curve as the labor

market gets weaker so too will consumer

prices and those two things go hand in

hand some Bank of Canada officials are

increasingly worried about down side

risk to inflation as they decide how to

set interest rates While others see them

as more balanced as I said there's

always going to be factions at every

Central Bank what they're really talking

about here is they talked about the

labor market they talk about weakening

in employment and that as consumer

prices become

disinflationary they don't just gently

glide into the Central Bank Target of 2%

in a you in a perfect soft Landing

there's a high degree of risk because

this is what always happens that

consumer prices that were elevated

continue to weaken with the economy and

then go right past that 2% Target right

under the 2% Target and then we're stuck

in something like the 2010s again

exactly what the bond markets and swap

markets and all these other markets have

been pricing the entire time now Central

Bankers are beginning to see it too and

not only they're beginning to see it

they're beginning to act on their

concerns and this is something that I've

been writing a lot about at eural

University's Deep dive analysis

subscription in fact tonight I'm going

to talk about we're going to go deep

into the US CPI to talk about the

mechanics of undershooting breaking down

shelter and Rental components of the US

CPI why it's way over States the risk to

Consumer prices or what's really

happening in consumer prices that may

already be reflecting that substantial

weakness and how that plays out in

markets as well as policy actions so

check out our subscriptions available at

for a deep dive analysis at our website

Euro dollar.

University but to the main event here we

got 50s potentially in in Canada we got

50s coming up potentially in Switzerland

both of them saying risks of consumer

prices to the downside and the Swiss at

the very least now forecasting inflation

or consumer price rates that are subst

are are likely to be substantially below

the Swiss National bank's

Target Switzerland's government slashed

its inflation forecast move in line with

expectations that the central bank will

cut interest rates again when officials

meet next week consumer prices were grow

at an annual 1.2% in 2024 and only 710

of a percent in the following year at

least according to the state Secretariat

for economic Affairs or SEO that's what

they said this on Thursday today that's

down from a prior forecast of 1.4% and

1.1% respectively in Compares with the

Swiss National Bank predictions of 1.3%

and 1.1% but those are going to follow

seo's recommendations so given all of

that the risk of undershooting not just

the risk the very high likelihood that

they're going to undershoot an inflation

Target next year in Switzerland and

given the fact that it's driven by

weakness especially in Europe and

overseas as the Swiss National Bank has

said since it kicked off this rate cycle

several months ago they've said that

Prim the downside risk was going to be

Global weakness and that could possibly

contribute to too much disinflation

again that's a thing that we keep coming

back to not just undershooting Central

Bank targets that's what central banks

say in their own terms it's it's it's

really about too much disinflation which

is reflecting widespread weakness not

just in one place or another but all

over the place and now the central

Bankers in all these countries are

starting to realize that it's actually

more than just a risk so according to

recent reports and statements by

economists in

Switzerland now the question for the SNB

is not anymore whether to cut 25 basis

points or to hold but whether to cut 25

or to cut 50 according to Sebastian

Giger chief investment officer at bank

cantel V I'm not even going to pronounce

that in some place in Switzerland the

chance of a 50 basis point cut is

substantial said stepen gurock EFG

bank's Chief Economist in Zurich gauging

the likelihood of such a move at 40%

against 60% for a quarter step and while

the majority of Swiss economists have

seen a smaller size reduction as the

most likely scenario for several months

currency investors have been pricing

more

again the markets are well ahead of the

central bankers and of course economists

too but even the economists are starting

to look at what's going on in the

markets and what's being priced in the

markets and saying yeah I see what

they're pricing I see what's really

concerning these marketplaces and

participants so now the Swiss National

Bank along with the Bank of Canada

people are thinking there's going to be

50 basis point rate Cuts coming from

both of those but what about Europe over

in Europe the the ECB has been more

careful because they still seem to think

that they have a consumer price problem

going by quarter basis point cuts and

not at every meeting and at the last

meeting which was earlier in September

they cut by 25 basis points and and said

they were very likely to wait until

December to move again but just this

week especially after the FED moved

several ECB officials started to suggest

that maybe October's in play too here

Christine lagard president of the ECB

said H we're likely to wait until at

least she hinted that they're likely to

wait till December then the ecb's chief

Economist Philip Lane came out and said

well maybe the policy makers should

retain their optionality about October

which didn't necessarily mean that

October was likely to happen there' be a

ray cut then but suggesting that uh it's

not out of the out of the range of

possibilities and one ECB Governor

governing member Mario sentino who was

the head of the bank of Portugal he said

that we probably should cut in October

now Sentinel is a labor market Economist

and he is very concerned about what's

happening in the European labor market

that is not as robust as some of the

statistics make it seem which again

sounds familiar and according to a

report just today the European Central

Bank may have to up the pace of its

interest rate Cuts as data published

since last week's Cuts suggest growth

and inflation could fall short of the

bank's new projection said rate Setter

Mario senteno given the position in

which we are today in the monetary

policy cycle we really have to minimize

the risk of here it is under shooting

because that's the main risk according

to his position he went on to suggest

that his main area of concern is indeed

the labor market because despite the

fact that the unemployment rate in

Europe hasn't really moved up here over

the last year or so there have been

numerous indications that labor market

dynamics in Europe have dropped off

really substant and again it's not

layoffs that trigger recessions layoffs

are a byproduct of a recession that is

triggered by the lack of hiring and

that's what Sentinel sees in European

data he said that he pointed out that

new vacancies for example they have

fallen by about 20% at the same time the

number of people who have lost their job

over the last three months has risen by

8% so you have the lack of hiring and

already a small potential suggestion

that hire that in addition to the lack

of hiring layoffs might have started

across Europe as as

well and these negative potentials are

underscored by as the article said I

just mentioned some recent data that is

really alarming the zew reports for both

Europe as well as Germany specifically

these are widely followed highly

influential reports because there's

surveys of commercial and financial

agents basically the professional sector

in Europe as well as Germany and these

numbers which had looked better through

the early part of the year have

absolutely dropped off a cliff over the

last three and four months the zew

sentiment index for Europe hit 9.3 as of

September which is its lowest since last

October but most importantly it's down

more than 40 points over the last three

3 months suggesting that something

materially changed the risk of

undershooting inflation over the LA over

the Summertime Summertime being the time

for recession this is one reason why

when you put it together with everything

else the ECB started cutting rates in

the first place even though they had

previously promised we aren't going to

even think about doing so until Consumer

Price numbers are back on target now not

only are the numbers still above the

target they're cutting rates as if the

there's a huge risk that those Consumer

Price numbers are going to go below

Target in fact that's what Sentinel was

talking about for Germany specifically

the zew for September came in at just

3.6 that was 47.5 back in June when

things were looking a little bit better

in Germany fell to 41.8 in July so

you're talking about a twomon crash in

the widely followed ZW and even more

alarming the current conditions index

for the zew came in at minus 84 A5 for

September which is the lowest since May

of 2020 so not only did Germans assess

their current situation as ridiculous

ully low and in the territory that would

lead to undershooting Consumer prices

and all the weakness that goes with it

they're also saying they're less

optimistic about getting out of that

situation too which is a very toxic mix

and into it now we add the German

Central Bank the bundas bank which just

today came out with a report that said

well you know what that second half

rebound that we've been predicting yeah

that's probably not going to happen

either after German GDP contracted by a

tenth of a percent unexpectedly in the

second quarter they the bundas bank now

expects there's likely to be a small

contraction in the third quarter too so

that would meet the technical definition

of recession which doesn't actually

matter because Germany has been in

recession since the fourth quarter of

2022 just like Europe has and so what

we're talking about here is as Europe

and Germany fell into recession quite a

while ago that recession is likely

heating up not consumer prices so the

undershooting in Consumer Price the risk

of undershooting in consumer prices is

this recession that the Europeans have

been in getting worse as the zew

statistics suggest and that's not the

only and so finally one last Point

really punctuating all the weakness and

this risk of undershooting which is

really recession conditions I mentioned

last week Volkswagen said it was

considering closing factories in Germany

for the first time in its history just

this week Intel came out and said that

huge Factory that we promised to build

that we planned on building in Germany

yeah we're not going to build that Intel

chief executive Pat gilinger said on

Monday that the company will postpone

the construction of a chip factory in

magniberg Germany for at least two years

which I mean you start you postpone

something this big for a couple years

it's likely it's going to be either

scaled way down or scrapped entirely

intel was planning to build two chip

factories in Saxony near Berlin creating

some 3,000 jobs with a groundbreaking

ceremony already planned for this year

and now they say forget about it so talk

about all of the labor market weakness

that officials Central Bankers are

talking about here it is with Intel

saying we were going to hire 3,000

workers but it looks like that's not

going to happen and this this follows

Intel already saying last month that it

was going to get rid of about 15% of its

Global Workforce 177,000 workers by the

end of this year so here you have

Central Bankers talking about upsizing

rate Cuts because they're worried about

undershooting Consumer Price targets

which is a fancy word for recession

conditions you've got business is saying

yeah we're going to act on those

recession conditions we're going to be

those recession conditions we're going

to stop hiring workers and maybe fir

workers and cut back planned Investments

and everything else if it looks like a

recession and it talks like a recession

and Central Bankers call it unders

shooting it's not a strong

economy so while there will be dieh hard

inflationist among policy makers to the

very end that always happens in every

economic climate that's going to

continue to be the case more and more

these Central Bankers are now witnessing

really substantial and really

potentially dangerous weakening in their

economies when everything was supposed

to be turning around disinflation was

supposed to lead to the soft Landing

that as the economy gently glided into

it they could pull back on their on

their restrictive rate policies as they

as they see them just gently a little

bit here and there and everything would

just be complete Goldilocks so more and

more Central Bankers are seeing the

warning signs put into their own terms

unders shooting is now the main theme

and it just means what falling bond

yields do low growth and low inflation

expectations and if it goes too far as

the indications continue to pour in

suggesting as much you don't just get

low growth and low inflation

expectations you potentially get

Negative growth and if we're really

unlucky and the labor Market's really

unlucky negative inflation and that

sounds really good after the last couple

years but the conditions that lead to it

are not and even Central Bankers can see

it coming too that's why we're getting

this rash of accelerating rate Cuts

schedules all over the

world talk about fears of undershooting

some very sobering indications from the

US consumers crashing income

expectations for the near term as well

as the long run talked about that that

in the video link below as always thank

you very much for joining me huge thank

you your University members and

subscribers and until next time take

care