Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: The following podcast was recorded on the 18th of May, 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: To our regular listeners, please note that the name of this podcast is Changing to the Macro Brief from the 1st of June, 2023.
Speaker: You'll find us in all the usual places by searching for the Macro Brief.
Speaker: And now onto the podcast.
Speaker: Hello, I'm P.S.
Speaker: Butler in London, and I'm joined by Aileen Van Dyne in New York.
Speaker: Hi Piers!
Speaker: Coming up on today's programme, we assess the ongoing uncertainty around the US debt ceiling and how it could affect the outlook for the dollar.
Speaker: We find out why the Swedish economy deserves more attention than you might think.
Speaker: And what issues are companies thinking about and talking about most?
Speaker: We explain how data science techniques can give us insights.
Speaker: We begin this week here in the US where debate around the debt ceiling is continuing.
Speaker: The country could run out of cash and even default if no agreement is reached by June.
Speaker: Dara Ma, head of FX strategy in the US is here to look at how the uncertainty could affect the dollar.
Speaker: So Dara, let's start with a quick update on where we stand in the debt ceiling negotiations.
Speaker: Well, they're still negotiating, but the recent mood music has improved this week relative to last.
Speaker: President Biden has expressed confidence that an agreement can be reached.
Speaker: The House Speaker, Mr. McCarthy, has said that a deal this week is doable.
Speaker: We'll see if all of that happens.
Speaker: President Biden's heading to Asia for the G7 summit.
Speaker: He's back in the US on Sunday, and he suggests that a deal is unlikely before he gets back.
Speaker: So that's the kind of timeframe we're operating on, but definitely a better aura around the negotiations than we had last week.
Speaker: So, well, we'll see how it plays out, but it is encouraging.
Speaker: And Dara, has this had any impact on the markets yet?
Speaker: Because obviously, the effects of no deal could be significant.
Speaker: But we have been here before, there have been these negotiations, it seems to be part of US politics almost around the debt ceiling.
Speaker: It is having an impact on markets, but really only in particular pockets of particular markets.
Speaker: And I think part of that is, as you say, we've been here before, there's a working assumption that this might go down to the wire, but ultimately they'll find a resolution.
Speaker: Or even if they don't find a timely resolution, that any kind of default scenario would be rather short lived.
Speaker: So it's, you know, the kind of the lasting takeaways for currency markets and others has been, I would say, relatively limited.
Speaker: Now, of course, all that can change if that presumption proves overly optimistic and we don't get a deal and we have a protracted default scenario.
Speaker: But what's interesting there is that even if we were to make that assumption of a protracted default, for example,
Speaker: it's not always immediately clear what the currency takeaway would be.
Speaker: For example, the dollar is the safe haven on paper.
Speaker: We should buy it if we're in a problematic setup.
Speaker: But by the same token, this is a US-centric problem.
Speaker: So do you really want to own US assets when that story might be unraveling?
Speaker: So even if we had clarity on the outcome, it's not necessarily a case that there's clarity on how the currency market might respond.
Speaker: And I imagine that would be true of other markets also.
Speaker: And I suppose to that point, the experience in 2011, where the US credit got downgraded due to similar kind of concerns and a similar situation, the dollar rallied in that context, didn't it?
Speaker: Yeah.
Speaker: So there was a safe haven element there.
Speaker: The difficulty, of course, always with comparing with a previous episode is there's seldom only one thing going on in currency markets or in financial markets.
Speaker: And in 2011, there was a number of moving parts.
Speaker: And of course, in 2023, we've also got the Fed to think about, presumably near or at the peak of its tightening cycle.
Speaker: How does the...
Speaker: death ceiling story play out in the context of monetary policy.
Speaker: We've got the ECB tightening.
Speaker: We have still inflation too high globally.
Speaker: So there's a lot of
Speaker: elements that bond markets and by extension currency markets have to digest and it it doesn't really lend itself to this neat kind of well in 2011 we had this impact and therefore we could anticipate an identical reaction function in 2023 it'd be lovely if we could do that it would make my job easier but um sadly that's not quite i suspect how it plays out well it means we have lots more to talk about dara so thanks so much for the update thanks thanks selene
Speaker: It's been a good week for Sweden as they scooped this year's Eurovision Song Contest on Saturday night.
Speaker: But on the economic side, things are not quite so positive.
Speaker: Already, weak activity data are getting worse, against a backdrop of sharp interest rate rises over the past year.
Speaker: So could this be a warning sign for the rest of the world?
Speaker: James Pomeroy, global economist, joins us now.
Speaker: James, thanks for joining us.
Speaker: Thank you for having me.
Speaker: So James, the state of Sweden's economy isn't usually at the top of investors' minds, but you're saying they should be paying more attention to it.
Speaker: Why?
Speaker: So Sweden's a really interesting, almost test case for the world so far this year, where the impact of high interest rates seems to be feeding through into the economic data really quickly and really clearly.
Speaker: So we've seen a big slowdown in the housing market, one of the worst housing markets globally over the course of the last year.
Speaker: But this is now spreading into a broader consumer demand, which looks to have fallen off a cliff.
Speaker: We can see this in much, much weaker credit growth than many other parts of the world.
Speaker: Consumer confidence, business confidence are extremely subdued.
Speaker: But also, interestingly, now we're seeing corporates starting to think differently about some of their pricing plans, all things that the rest of the world is looking for during the course this year.
Speaker: They're happening in Sweden today, and therefore it's probably worth giving it a bit more attention.
Speaker: So what exactly are the latest data showing?
Speaker: They're pretty concerning.
Speaker: If you look on the housing side of things, you've got a drop in house prices that's probably close to 20% based on piecing together some of the underlying data we can look at.
Speaker: But also if you look at the consumer side of the economy, retail sales spending is down slightly.
Speaker: getting on 11% in real terms year on year, total spending is down about 4% year on year.
Speaker: You've got consumer confidence close to record lows, credit growth that's really not growth anymore.
Speaker: And altogether, this is an economy that's slowing down very, very quickly and is likely already in recession.
Speaker: What's the reaction been to that slowdown in demand?
Speaker: So we've seen a little bit of a change in terms of the pricing strategies of businesses.
Speaker: So originally, all the way through last year, you had a very, very strong situation with lots of businesses raising their prices because you had very, very strong demand.
Speaker: Then you saw the opposite story start to happen so far this year, where businesses were getting a little bit more concerned about
Speaker: demand situation, they're starting to talk about discounting.
Speaker: And this could be a really interesting lead indicator for the rest of the world when thinking about those inflationary pressures, because if businesses are starting to think about discounting, this could feed through into inflation further down the line.
Speaker: So what is the outlook for inflation and what will the central bank do?
Speaker: So we think at the moment that inflation is going to come down quite quickly in the second half of this year, but that's not quick enough for the Riksbank.
Speaker: So the Riksbank, the Swedish central bank, is likely to lift its policy rate at its next meeting in June 2021.
Speaker: But by the time we get to the back end of this year, we think we're going to see a bit of a collapse in those inflation data.
Speaker: And coupled with weakness in demand, we think this could lead to a bit of a change in tack from the central bank.
Speaker: And we still expect rate cuts to start at the very end of this year and rate cuts to continue through next year.
Speaker: So the Swedish example, that lead indicator potentially for the rest of the world, could well mean it's one of the first developed market central banks to start cutting rates.
Speaker: James, thanks very much.
Speaker: Thanks very much.
Speaker: Now, with the latest earnings season broadly complete, our data science team has used natural language processing, or NLP, to analyze what companies have been saying on their earnings call.
Speaker: Shiva Jun, data scientist, is here to explain.
Speaker: Jun, welcome to the podcast.
Speaker: It's good to be here.
Speaker: Thank you.
Speaker: So first, give us a sense of the scale of the processing that's taking place.
Speaker: Yes, so every quarter, thousands and thousands of companies release their earnings reports.
Speaker: And probably for sector analysts, it's easier to just focus on their individual group of companies.
Speaker: But when you take all of these companies together, it's impossible for any one human to read through
Speaker: hundreds and thousands of reports every quarter.
Speaker: And this is where machines excel.
Speaker: NLP, it's a branch of artificial intelligence where we teach machines how to read and understand language as humans do.
Speaker: And then we use it to understand what are the overarching themes that companies around the world are talking or discussing currently.
Speaker: So let's start with the macro picture.
Speaker: What is the NLP analysis this time picking up?
Speaker: So as it's in the news everywhere, interest rates and macro backdrop is something the companies are discussing everywhere.
Speaker: What we find interesting was the things which companies are not mentioning anymore.
Speaker: And the two key themes were recession and inflation.
Speaker: The company management is not that concerned about these two particular themes, which suggests that the fears of recession and inflation sort of peaked in the last earnings season and are now dissipating.
Speaker: So that'd be a sort of fairly positive signal from your perspective?
Speaker: It would hope so.
Speaker: It looks like the things which the companies are now more focused on is the things that they know more about.
Speaker: So their earnings and their margins and their revenues.
Speaker: And the sentiment that the companies are showing for these topics, which they would have key insight on, has been more positive this earnings season than it was the last one.
Speaker: So looking at these two contrasting things together, it does show some optimism across different companies, across different sectors for this earnings season.
Speaker: And another interesting one was the term de-stocking.
Speaker: That seemed to feature, didn't it?
Speaker: Yes, that's a big one this earnings season.
Speaker: We find growing evidence of companies in DM economies talking about destocking.
Speaker: Now, that in turn is an interesting term because we haven't seen that in the past couple of years where companies were focusing on restocking during the supply chain issues.
Speaker: De-stocking now means companies at some point will have to replenish their inventories, perhaps at a better price point, which is going to lead to a better growth and also provide a sustenance to leading indicators like new orders inventories, which is currently at the super low levels.
Speaker: Because from all the work that you've done around NLP, the evidence is that it has some quite good predictive powers.
Speaker: Yes, it does, especially the sentiment that we measure for different themes across the companies.
Speaker: And we found that it has very good relationship with classic leading indicators like ISM.
Speaker: So we are seeing ISM has not rebounded yet, but the company sentiment has actually rebounded quite positively, which suggests there's going to be a rebound in growth in the near term.
Speaker: Now, in your report, there's a fantastic chart which tracks, for example, the increase in interest in a particular term.
Speaker: And one of the terms that's gone sort of rocketing up is artificial intelligence.
Speaker: I suppose that's not surprising, but it's still a pretty powerful signal.
Speaker: Yes, everyone wants to talk about AI right now, kind of mirroring global trends.
Speaker: But yeah, that's true.
Speaker: Both in EM companies and EM companies, everyone's talking about artificial intelligence, specifically about generative AI.
Speaker: And it's not something that you wouldn't expect because although it's a very important disruptive technology, generative AI, I think, is going to be very important in enabling automation across industry, across sectors.
Speaker: And we find evidence of that in the report because we see the company management are talking about things like generative AI much more often than even robots.
Speaker: to put it in perspective, robots are something companies have been using for decades now.
Speaker: It does provide an interesting avenue to see how much this hype has surrounded all the sectors and industries.
Speaker: Well, we'll see how that develops.
Speaker: But for now, thank you very much for joining us.
Speaker: Thank you.
Speaker: That brings us to the end of another podcast.
Speaker: Thanks to our guests, Dharam Ma, James Pomeroy, and Shivajoon.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
