Historic rate hike in Switzerland shakes markets

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This is an audio transcription of the FT press briefing podcast episode: Historic rate hike in Switzerland shakes markets

Marc Filipino
Hello from the Financial Times. Today is Friday, June 17, and it’s your FT News Briefing.

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A chorus of central banks raised interest rates this week in an attempt to fight inflation.

Katie Martin
This is an exceptionally risky point for the economy and by extension, therefore, for the market. Stocks don’t like this at all.

Marc Filipino
Germany asks its citizens to save energy while Russia continues to turn off the taps. And Europe is facing a new wave of Covid hospitalizations as Omicron sub-variants increase. I’m Marc Filippino and here’s the news you need to start your day.

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Interest rates are rising in the US, UK and Europe and stocks are falling accordingly. The Federal Reserve and the Bank of England raised rates this week. The Bank of Switzerland too. But we’ll get to that in more detail in a moment. The S&P 500 and FTSE 100 didn’t like it. They ended their trading days down more than 3% on Thursday.

Katie Martin
Yes. So, you know, a pretty quiet week in the markets, really. Not much is happening. No, it’s just been pretty hectic there.

Marc Filipino
The FT’s Markets Editor Katie Martin has been quite a busy editor this week. Katie, dealer choice, which central bank do you want to talk about first?

Katie Martin
So let’s start with the biggest. Let’s start with the Fed, the US central bank, which has had what I think you could politely describe as a massive failure of sense of humor in the face of rampant inflation. And it raised interest rates by 0.75 percentage points this week. It’s a lot. It’s the biggest interest rate hike since 1994, which people keep telling me is almost 30 years old, even though I don’t believe it. And they gave some hints that they might. But nonetheless, it’s huge and it’s the Fed’s way of saying, we’ve got to do something about inflation, we’ve got to do it fast, we’ve got to do it aggressively. It’s become a bit of a competitive sport, you know, on Wall Street to make increasingly outlandish predictions about what the Fed is going to do next. So the mood music here is that it’s going to be really hard for us to get this inflation under control without accidentally causing the economy to crash. It is therefore an exceptionally risky point for the economy and, by extension, therefore, for the markets. Stocks don’t like this at all.

Marc Filipino
And the Bank of England yesterday raised interest rates for the fifth consecutive time by a quarter of a percent. How did the market react to this?

Katie Martin
It’s worth noting, actually, that, you know, the pound has rallied a bit from that interest rate hike, which is normally what you’d expect from an interest rate hike , but not that much. And that tells you that the market thinks the UK economy is in trouble for a whole host of reasons besides monetary policy. If that’s not fun enough for you, even the Swiss, the Swiss National Bank hasn’t raised interest rates since 2007, and this week they walked out with half a percentage point. It should be borne in mind that Swiss benchmark rates are still -0.25%. Nevertheless, if the Swiss are in this game, then you can say that it is really spreading around the world. Central banks are really keen on imposing some authority on the markets and on the kind of global inflation profile.

Marc Filipino
So what’s the TLDR here, Katie? What’s the takeaway here?

Katie Martin
Well, all of that added, for the markets, to this realization that we’re in a bit of a pickle here. And if the central banks can get inflation under control, which is entirely up to them, fine, but, you know, they’re big players here. If they can get inflation under control without breaking other things, you know, as much as my mom always says, you can’t make an omelet without breaking eggs, if they can make it without breaking eggs, then it will be frankly miraculous at this point.

Marc Filipino
Katie Martin is the FT’s Markets Editor. Thank you Katie.

Katie Martin
OK. Carefree.

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Marc Filipino
The European energy crisis is becoming even more serious. Russia has drastically reduced the gas supply it sends to several countries. Flows through the main Nord Stream pipeline have fallen by 60% in recent days. Russian state-controlled gas exporter Gazprom says this is due to technical issues. But EU politicians say it is a political decision and retribution for supporting Ukraine in the war there. Today, the German Vice-Chancellor is pleading with residents to reduce their energy consumption. The head of the Berlin office of the FT, Guy Chazan, is there to take stock. Guy, that’s pretty dramatic for a politician to tell people to do. Why did he feel like he needed to say that?

Guy Chazan
Well, he needed to say it because there is a serious problem now. I mean, the drop in volumes pushed by Nord Stream has really been quite dramatic. I mean, on Tuesday, Russia reduced the daily volume by 40%, from about 167 to 100 million cubic meters. And since then the volume has fallen to 67 million cubic meters. So that’s a really dramatic reduction. It comes at a time when normally it takes the gas and stores it for the coming winter months. And if it can’t reach a reasonable amount of storage, it’s going to be a serious problem for the winter. So the Vice-Chancellor, Robert Habeck, said the situation was serious and you know businesses and citizens need to do what they can to save energy. Every kilowatt-hour helps in this situation, he said in a kind of direct video call they put on Twitter.

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Guy Chazan
We are therefore already talking about owners who do not heat houses and apartments to the same degree as they normally would. These are the political responses that are currently being debated in German society. Can we really force people to save energy if they don’t do it voluntarily?

Marc Filipino
So Guy, how do German residents feel about all of this? Are they in favor of this call to reduce their energy consumption?

Guy Chazan
Yes, they are at the moment, but that could change if it becomes some kind of long-term problem. The gas supply gradually dwindles and then people are told they can’t take hot showers and things like that. I mean, at the moment people don’t really feel directly concerned with this, but that could change very soon. I mean, if the problem persists in the winter, then we’re going to have a serious problem on our hands.

Marc Filipino
Now, Guy, is it serious for the German economy?

Guy Chazan
Well, I think at the moment the industry hasn’t sounded the alarm bells yet. But if it persists, I mean, I guess the crucial thing is, is it a problem with the turbines and will Siemens Energy fix it? The company says it is currently working on the issue and hopes to find a solution. I guess then, you know, there will be a big sigh of relief if that happens. But there is obviously this other aspect, which is, as Habeck says, that this is just a political decision that comes straight from the Kremlin, in which case it is a much more serious matter. So far, companies have been, you know, big customers of Gazprom have been pretty quiet. But the longer this persists, I think the more anxious they will become.

Marc Filipino
Guy Chazan is the FT’s bureau chief in Berlin. Thanks, Guy.

Guy Chazan
Thanks.

Marc Filipino
Covid deals another blow to Europe. This time it’s because of sub-variants of the highly infectious Omicron strain. The FT analyzed data showing that hospital admissions have increased in several countries, including France and England. And the BA.5 subvariant of Omicron now accounts for more than three quarters of new infections in Portugal. Experts say complacency could play a big part in all of this. Many places aren’t testing Covid as much as they had been, which means it’s harder to detect new mutations and act quickly. Plus, it could lead to other problems down the road. Experts are worried about waves later in the year which will put even more pressure on health systems.

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You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back next week for the latest trading news. The FT News Briefing is produced by Sonja Hutson, Fiona Symon and me, Marc Filippino. Our editor is Jess Smith. We had help this week from Michael Lello, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s Global Head of Audio. And our theme song is from Metaphor Music.

This transcript was generated automatically. If by any chance there is an error, please send the details for a correction to: [email protected]. We will do our best to make the change as soon as possible.

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