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Forward Guidance

Swiss Re’s Patrick Saner on Soft Landing Scenario, Central Bank Balance Sheet Policy, and Inflation Volatility

Thu Feb 22 2024
Economic IndicatorsFinancial ConditionsBalance Sheet SizesRate CutsYield Curve InversionInflation ImpactInsurance PortfoliosEurozone EconomyForecastingDecision-Making


This episode covers economic indicators, financial conditions, balance sheet sizes, rate cuts, yield curve inversion, inflation impact on asset allocation and insurance portfolios, challenges in the Eurozone economy, and forecasting for decision-making amidst market uncertainties.


Patrick Sonner focuses on economic indicators and longer-term capital market outlook.

In the US, there is growth resilience despite market uncertainties. Eurozone faces economic stagnation with variations among countries.

Central banks reconsider balance sheet sizes and policies.

Quantitative tightening (QT) varies between different banks. ECB considering further reduction to address reserve scarcity in the Eurozone.

ECB considers rate cut and yield curve inversion as recession indicator.

Market expectations suggest rate cuts by the ECB. Yield curve inversions have had false positives in the past.

Inflation volatility impacts asset allocation and insurance portfolios.

Inflation assumptions crucial for strategic asset allocation. Insurers sensitive to inflation, correlations between assets change based on volatility.

Inflation volatility affects insurance portfolios and investment decisions.

Structural factors and COVID intensify inflation spikes. Portfolio construction needs to consider inflation swings.


  1. Economic Indicators and Financial Conditions
  2. Balance Sheet Sizes and Policies
  3. Rate Cuts and Yield Curve Inversion
  4. Inflation and Asset Allocation
  5. Inflation Volatility and Insurance Portfolios
  6. Challenges in the Eurozone Economy
  7. Forecasting and Decision-Making

Economic Indicators and Financial Conditions

00:00 - 07:42

  • Patrick Sonner, head of macro strategy at Swiss Re, focuses on economic indicators like inflation rates and longer-term capital market outlook.
  • In the US, there is growth resilience with indicators suggesting potential momentum uptick in Q1 despite market uncertainties.
  • Eurozone faces economic stagnation with variations among countries like Germany being fragile while Spain, Portugal, Italy show signs of doing well.
  • Financial conditions analysis reveals a complex scenario where monetary policy appears tight but overall conditions remain loose due to factors like fiscal deficits and central bank balance sheet size.
  • Central banks have control over certain financial variables like overnight rate and tenure rate but less influence over credit spreads, equity valuations, and currency values.

Balance Sheet Sizes and Policies

07:15 - 14:16

  • Financial conditions index can be affected by various factors like investment grade, high yield, loan conditions, and equity valuations.
  • Central banks like the Fed and ECB are reconsidering their balance sheet sizes and policies to impact financial market functioning.
  • Quantitative tightening (QT) is being pursued by central banks to reduce balance sheets, but the approach varies between different banks.
  • The ECB is considering reducing its balance sheet further to address reserve scarcity in the Eurozone.

Rate Cuts and Yield Curve Inversion

13:58 - 20:47

  • The European Central Bank (ECB) is considering a rate cut due to progress on inflation and wage negotiation outcomes.
  • Market expectations suggest around 105 basis points of cuts by the ECB until the end of the year, reflecting the precarious economic outlook in the euro area.
  • Discussion on yield curve inversion as a potential indicator of an upcoming recession, with considerations on central bank balance sheets influencing long-term rates.
  • Yield curve inversions have had false positives in the past, so it's important to consider multiple indicators when assessing the likelihood of a recession.
  • Despite concerns raised by yield curve inversion, there is no clear indication of a broad-based recession based on various economic indicators.

Inflation and Asset Allocation

20:25 - 28:02

  • The work at Swiss Re involves establishing long-term capital market assumptions for strategic asset allocation and asset liability management.
  • Providing economic and interest rate assumptions that impact pricing of insurance and reinsurance contracts is crucial.
  • Inflation volatility is significant for large portfolios and the insurance business due to its impact on correlation assumptions between assets.
  • Insurers are sensitive to inflation, especially in areas like motor insurance, where inflation directly affects costs that cannot be hedged on capital markets.
  • Correlations between assets change based on inflation volatility, impacting diversification potential across asset classes.

Inflation Volatility and Insurance Portfolios

27:47 - 35:46

  • Structural factors like supply chain future-proofing and geopolitical tensions can lead to inflation spikes.
  • COVID has intensified existing aspects that could contribute to inflation spikes.
  • Portfolio construction for insurers and investors needs to consider potential swings in inflation levels.
  • Institutional investors, particularly in the insurance business, focus more on fixed income assets than stocks.
  • Higher inflation and volatility impact the interplay between assets and underwriting activities for insurers.
  • Inflation volatility affects correlations between credit risk, duration, and rate volatility for insurance portfolios.

Challenges in the Eurozone Economy

35:19 - 42:07

  • The Eurozone economy is facing challenges with potential for weakness ahead.
  • Despite recent growth, the Eurozone still shows signs of stagnation and precariousness.
  • Two consecutive quarters of negative GDP growth alone may not indicate a recession without significant labor market impacts.
  • Macroeconomic analysis mistakes include mistaking correlation for causation, groupthink, and lack of open-mindedness.

Forecasting and Decision-Making

41:46 - 48:07

  • Forecasting is useful as an anchor but not the absolute end result; scenario thinking is valuable to question assumptions and improve analysis
  • Market pricing indicates a dominant view of a soft landing in the US, with alternative scenarios being stagflation or recession
  • Being open-minded, having an action plan, and considering short-term vs. long-term perspectives are crucial for making strategic decisions amidst market uncertainties
  • Working at a central bank vs. a private financial firm requires different mindsets due to serving different purposes and stakeholders