Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, where we speak to the economists and strategists behind some of our key reports.
Speaker: On this week's program, we look at what monetary policy tightening by major central banks means for the currency markets.
Speaker: We discuss how the latest data are highlighting mounting issues for the global economy.
Speaker: And we find out why Brexit is back on the agenda in Europe.
Speaker: This podcast was recorded on Thursday the 12th of May 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: I'm Aline Van Dyne.
Speaker: Central banks are very much in focus at the moment.
Speaker: The Fed and the Bank of England have begun their tightening cycles, and the market now expects the ECB to follow suit in July.
Speaker: So what does this mean for the currency markets?
Speaker: We're joined by Paul Mackel, Global Head of FX Research.
Speaker: So Paul, how do you explain the dollar's strength that we've seen?
Speaker: Well, our framework on the dollar has been very much determined by two key factors.
Speaker: The first is the ebb and flow of global growth.
Speaker: So when global growth is slowing, then that tends to coincide with dollar strength.
Speaker: Global trade flows are undermined, risk-taking behavior becomes more cautious.
Speaker: All these things actually feed into a stronger dollar.
Speaker: The second feature relates to the Federal Reserve.
Speaker: It's pretty well telegraphed how hawkish the Fed has been, and as it continues to raise interest rates over the next few months, that should be emphasizing the policy divergence versus many other central banks that can give the dollar the upper hand.
Speaker: The Fed hasn't been alone in telegraphing increasingly hawkish policies.
Speaker: The ECB, for example, has also done it.
Speaker: So why is it that the language from the ECB isn't offsetting dollar advances?
Speaker: Well, I think some forecasters are making that case that a hawkish ECB will support the euro.
Speaker: But what we've been considering is can the ECB really deliver on the rate hikes that are already priced into the market?
Speaker: And our argument is no.
Speaker: And if that's the case,
Speaker: then that could work against the euro in the months ahead.
Speaker: On the other hand, the Fed's still going to be raising interest rates pretty progressively.
Speaker: They're in a better position to deliver more on what's priced into the interest rate market and in turn keeping the dollar in that strong state.
Speaker: So that I think is very much emphasizing this policy divergence that can continue to see the euro weaken very modestly versus the dollar.
Speaker: Paul, the renminbi has gained such influence in the FX markets that it now holds sway along with the dollar over EM currencies.
Speaker: How do you explain this?
Speaker: That's absolutely right.
Speaker: The renminbi matters a lot for many other currencies.
Speaker: And when it begins to move,
Speaker: or that anchor is shifting, then it can transfer volatility to many other Asian currencies or commodity currencies.
Speaker: And its abrupt weakness lately has done exactly that.
Speaker: So it's not just about the dollar all the time for emerging market currencies.
Speaker: It's the bedrock for sure, but the renminbi is very influential as well.
Speaker: And what would it take for the RMB to recover the ground it has lost recently?
Speaker: That's a really good question and I think it's going to be associated with China's economy eventually recovering.
Speaker: Now we know that the current outlook or the near-term outlook is indeed a challenging one, but nonetheless if the economy begins to rebound fairly swiftly later this year, that could provide some support for the renminbi to recover and we forecast some modest appreciation or recovery versus the dollar come the end of this year.
Speaker: Paul, thanks very much for the update.
Speaker: So now let's look at how higher inflation rates and uncertainty are weighing on the outlook for economic activity.
Speaker: James Pomeroy, global economist, is here to talk us through the latest data.
Speaker: James, welcome to the podcast.
Speaker: Hey, good to be here.
Speaker: So just how bad are the latest data?
Speaker: So they're probably not quite as bad as you might think, but they're not great.
Speaker: There's a lot to be concerned about in the Chinese data, the retail sales figures, the PMIs, some of the trade data in particular look pretty bad, which is unsurprising given the recent lockdowns in Shanghai and some other cities.
Speaker: But we're seeing this quite clearly in the Chinese data.
Speaker: But also the main concern for the rest of the world from that is some of the implications in terms of supply chains.
Speaker: So we've seen a sharp drop in the number of boats leaving China with products on.
Speaker: We've seen supply delivery times lengthen across Asia, across the world.
Speaker: And all of this maybe adds to a little bit of the concern around bottlenecks in global supply chains and what that can do in terms of future inflation and some of those challenges we had throughout 2021, where inflation pressures were high,
Speaker: And demand was held back or spending was held back by supply chain challenges.
Speaker: So it's not just the activity data.
Speaker: There appears to be a little bit of concern around some of those supply chains.
Speaker: And finally, consumers are clearly feeling the pinch from higher inflation and consumer confidence falling sharply in many parts of the world.
Speaker: And is there any good news?
Speaker: So that all sounds very, very negative.
Speaker: But the surprising thing at the moment is that whilst consumer confidence is down, some parts of the consumer story continue to look pretty good, notably in the labour market, where the jobs market is very, very tight in the US and continues to tighten in Europe too.
Speaker: And consumers appear to be continuing to spend, maybe not fast growth in consumer spending, but a lot of the high frequency data from credit card data or
Speaker: people traveling on planes or mobility data continue to look pretty good and suggest at least that whilst confidence is down, the tight labor market, some of the savings that people have got is putting a bit of support under some of these consumer spending numbers.
Speaker: So it's not necessarily good news, but maybe not as bad as we might think.
Speaker: Are you noticing any regional differences?
Speaker: Yeah, I think there's a big difference opening up in the data between the US, Europe and China.
Speaker: China, as I explained, the data have been particularly bad.
Speaker: In Europe, it's much more about the downside risks that are greater and the concerns that consumers are facing in terms of this real income squeeze because inflation has risen very, very quickly.
Speaker: both in the eurozone and the UK but you haven't had quite the same labour market response so you haven't got quite the same level of wage growth.
Speaker: That squeeze to real incomes is much much greater and could pose a bigger challenge further down the line whereas in the US the numbers are holding up relatively well and there's a sense that consumers are at least digging into their savings in order to continue to spend and that continued spend is something that is worth keeping an eye on you
Speaker: how are people going to continue to keep spending if they're cutting down on savings and they're facing a real income squeeze.
Speaker: But we are also noticing a bit of rotation in spending too.
Speaker: Services demand, particularly robust in the US, as the economy continues to have this reopening throughout the course of the last couple of months.
Speaker: So there's a slightly better story in the US, probably a middling story in Europe and a much, much weaker story in China.
Speaker: How will central bankers respond to this?
Speaker: So it's a big challenge for central banks with these high inflation rates in most of the world.
Speaker: And that's a big challenge in terms of thinking about tightening.
Speaker: And lots of central banks have started to tighten much more aggressively or signal they're going to tighten much more aggressively in response to the continued stickiness of high inflation.
Speaker: And this is something that's worth keeping in mind, that so many central banks who had shown a lot of caution
Speaker: in the course of the last couple of months around the growth outlook or thinking that inflation rates would come back down have changed their tune in recent months.
Speaker: And we've seen a lot of central banks suddenly start to tighten or suddenly discuss a much more aggressive pace of tightening.
Speaker: And that's just something to keep an eye out for.
Speaker: How many more central banks can make that transition and what could happen in terms of those rate expectations if inflation stays high and the growth outlook doesn't collapse?
Speaker: But it's worth keeping in mind those downside risks on growth.
Speaker: We could see some central banks like the Bank of England is doing show a little bit more caution around the negative growth shocks and potential for negative growth shocks.
Speaker: And that's where you could get some central banks opting to tighten rates much more slowly or to maybe even pause their tightening cycle.
Speaker: So you could well see a bit of a discrepancy across the world depending on how central banks treat this set of data, this high inflation story and this very uncertain
Speaker: growth outlook.
Speaker: James, thanks very much for the update.
Speaker: Thanks very much.
Speaker: We finish with a roundup of the latest developments in Europe, where the issue of Brexit is coming back onto the agenda.
Speaker: Let's speak to Liz Martins, senior UK economist.
Speaker: Liz, let's start with the UK.
Speaker: The latest data show that GDP contracted in March.
Speaker: How worried should we be?
Speaker: Well, a little bit worried.
Speaker: So GDP fell 0.1% month per month in March.
Speaker: We also had a downward revision to February, so that there was no growth in February, which means that basically for the last two months of Q1, there was net negative growth in GDP, which is not great, considering the surveys were suggesting that demand was pretty robust, the anecdotal evidence was strong, the labour market's been strong.
Speaker: So the GDP number, I think, was
Speaker: a bit disappointing.
Speaker: But there are a couple of things going on beneath this surface.
Speaker: The first is that COVID-19 related health spending has fallen back.
Speaker: Things like test and trace, the vaccination program, those were adding quite a lot to GDP up until January and have now fallen back.
Speaker: And the other issue is that one of the biggest drivers of the fall in March was a 15% decline in wholesale and retail trade of motor vehicles.
Speaker: There's car sales and that might suggest a big fall in demand.
Speaker: It might suggest the cost of living squeeze is starting to weigh on people's spending decisions.
Speaker: But actually, we know that there are huge supply issues in the vehicle sector.
Speaker: So perhaps what's more going on there is simply that people can't buy a car because these cars aren't available due to the global supply issues.
Speaker: So for Q1, I think I'm not overly worried just yet.
Speaker: But as we move forward, I think we are going to see a slowdown in demand in the UK because, you know, as we've mentioned many times on this podcast, the UK is moving towards having the biggest real income squeeze in many decades.
Speaker: This is because of much higher inflation, tax rises we've had in April and wages just not keeping pace.
Speaker: And as we move towards the end of the year, I think we will start to see that reflected more and more in consumer decision making and behaviour.
Speaker: And we will see a considerable slowdown in the in the second half of the year in the UK economy.
Speaker: We've also had some political developments and Brexit is back on the agenda.
Speaker: What's happening?
Speaker: That's right.
Speaker: So we had the UK local elections and the Northern Ireland Assembly elections on the 5th of May.
Speaker: The Northern Ireland Assembly elections resulted with Sinn Féin being the largest party.
Speaker: not the Democratic Unionist Party, and the latter have declined to participate in a new administration.
Speaker: And that's because they are still very unhappy with the Northern Ireland Protocol, which imposes checks on trade moving between Great Britain and Northern Ireland.
Speaker: Now, it looks like the UK government in Westminster is preparing to do something to make them a bit happier about this situation.
Speaker: And it looks like they are going to implement some legislation
Speaker: which will allow GB Northern Ireland trade to override some of the terms of the protocol.
Speaker: Now, they are trying to negotiate a solution with the EU, which would allow them to do that on a mutually agreed basis.
Speaker: But I think hopes are fading that a negotiated solution will be found.
Speaker: And so it looks like the UK might move unilaterally, in which case,
Speaker: you know, the EU may well retaliate.
Speaker: We don't know quite how that would be.
Speaker: But the ultimate risk is the termination of the entire trade and cooperation agreement, which caused the UK and the EU struck at the end of 2020.
Speaker: And that puts back onto the table that almost forgotten concept of the no deal Brexit that we talked about for so long following the referendum.
Speaker: Liz, thanks very much.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Paul Mackle, James Pomeroy and Liz Martins.
Speaker: We hope you found today's program useful.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
