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The Macro Brief – Globetrotting
522 Plays1 day ago
Janet Henry, Global Chief Economist, considers whether tariff uncertainties are starting to feed through into the latest economic data.
Disclaimer: https://www.research.hsbc.com/R/101/hktsWLP
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Transcript
Introduction to Global Insights Series
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
This podcast was recorded for publication on the 12th of June, 2025 by HSBC Global Investment Research. All the disclosures and disclaimers associated with it must be viewed on the link attached your media player.
00:00:34
Speaker
And don't forget to like and subscribe to The Macrobrief wherever you get your podcasts.
00:00:44
Speaker
Hello,
Global Financial Uncertainties and US Fiscal Concerns
00:00:45
Speaker
I'm P.S. Bartle in London, and this is The Macrobrief, where we look at the issues driving financial markets in developed and emerging economies. and uncertainty is still dominating across the globe.
00:00:55
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Tariff concerns persist and, in the US, debt dynamics and the promise of higher spending have heightened fiscal fears. It's a difficult backdrop for central banks such as the Federal Reserve, who meet next week.
00:01:08
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So on today's podcast, we're taking stock of what the latest news and data mean. I'm joined in the studio by a Global Chief Economist, Janet Henry. Janet, great to have you back. Good to be back, Piers.
00:01:18
Speaker
So here's my sort of feeling on it. Has uncertainty declined or have we just got used to it? It sort of feels calmer, but maybe we're in the eye of the storm.
00:01:30
Speaker
We had Liberation Day, then we had the 90-day pause, which is quite close to coming to an end. So maybe we should just firstly recap on what's been achieved during that time. There have been some trade deals.
00:01:41
Speaker
There's also been some legal challenges, other things happening. So maybe just recap on on that for us first. it's a good place to start. To some extent, we have got used to uncertainty, but also, at least as far as financial markets are concerned, some of their kind of worst case scenarios that perhaps we saw on April the 2nd, that announcement of some exceptionally high reciprocal tariffs.
00:02:04
Speaker
um
Impact of Tariffs on US Equity Markets
00:02:05
Speaker
I think those worst case scenarios um have kind of been put to bed by how quickly they were unwound. And now, of course, we've got much higher tariffs because we have got tariffs you know, an additional 30% or so on China on top of the 20% we already had. We've still got elevated tariffs on Canada and Mexico, and we've still got a broad 10% tariff on the rest of the world and higher tariffs on a number of sectors. Remember, we've got those those those tariffs on cars of about 25%.
00:02:37
Speaker
And of course, part of um President Trump's frustration with the international court ruling on how unlawful his um use of emergency powers were meant that he quickly came back with an increase in steel tariffs from 25% to 50%.
00:02:55
Speaker
But, you know, your your your overall point ah about have we got used to uncertainty, I think looking at the S&P, equity investors in the US seemingly have got used to the uncertainty. They they take the view that Actually, a lot of this is negotiating tactic.
00:03:13
Speaker
um You know, a lot of people argue that for large companies in the S&P, perhaps 10% tariffs or so is largely priced in.
Resilience and Strain in US Economic Indicators
00:03:21
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Obviously, as an economist, I have to be worried about non-S&P 500 companies.
00:03:26
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um A lot of people in the US work for smaller companies. um And the fact is tariffs will be feeding through into the economy. um It just might take time and it may not be the largest companies it may be.
00:03:38
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ah yeah Some of them, the smaller, more vulnerable companies that see a bit more of the pain. So let me challenge you on that, because it's fair to say that the data from the US has proved more resilient and expected. After all, in your global chart book, which you've just published, you entitled a section on the US charts, US activity is still chugging along.
00:03:57
Speaker
The hard data are, but, you know, when I go around the world talking to investors and certainly had a week in Asia in the middle of May, the question I got in every meeting was when, if ever, will the hard data follow what was absolutely tumbling soft activity data? You know, some of those consumer confidence indicators, even some of the business confidence indicators, they had fallen to levels we had not seen since the onset of COVID.
00:04:27
Speaker
In March 2020, they had absolutely imploded. But as the tariffs, the worst reciprocal tariffs were scaled back, um and the markets recovered, what we saw in the May survey data was either stabilisation or some improvement.
00:04:44
Speaker
but But the hard data and in particular the the labour market data, because of course last week we had the payrolls release, still registering an increase in employment, at least on payrolls of over 100,000 and we did see an increase in wage growth. Wage growth came in higher than expected And while we saw in the April retail sales data goods spending did fall back after the surge in some consumer goods ahead as part of this this front-loading bounce, actually even though goods spending fell in April, service sector spending actually rose. So so yes, the hard data has still remained very resilient.
00:05:24
Speaker
We would argue that there are some signs of cracks. starting to come through. The Household Survey showed a big drop in employment. there Also, there are fewer sectors now generating the jobs that we are getting in the US.
00:05:38
Speaker
So yeah, around the edges, there are some signs that things aren't quite as strong as they were. Initial jobless claims are rising, um but yeah. So market participants always want to know here and how exactly what's happening, but we're going to have to be patient in this. It's going to be a volatile ride for data, and we will see it all play out in the coming months.
00:05:58
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The
US Debt Downgrade and Fiscal Projections
00:05:59
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other thing that happened since Liberation Day was that one of the key rating agencies, Moody's, downgraded U.S. debt from the sort of AAA that they had.
00:06:09
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ah Was that more related to the big, beautiful Bill Act Act? I think it was a broader assessment of the the the fiscal dynamics underway now um in the US.
00:06:22
Speaker
And perhaps the the final catalyst was what is embedded within the um the Big Beautiful Bill Act that's now been passed by the House of Representatives and is making its way through the Senate.
00:06:34
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Of course, this this this loss of the AAA rating um from Moody's comes more than a decade after other rating agencies had already actually downgraded it. And as is often the case, um financial markets had already priced in a bit more of a a term premium into the Treasury market um because, you know, we are looking at a bill that's going to increase the debt stock rate.
00:06:57
Speaker
um quite significantly by, you know, arguably over $3 trillion dollars over the course of the next decade and some pretty big tax cuts being involved. and And when you've already got quite a large budget deficit and in the coming years are projected to maybe be spending 4% of GDP on interest payments and your debt to GDP ratio is already 100%,
00:07:21
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The fiscal dynamics just on any long-term projections look very, very worrying in a lot of people's eyes, even if the US is still the world's reserve currency.
00:07:31
Speaker
is Is that what the bond market is telling us in terms of the level of yields? Yeah, I think, you know, when you're looking at short term yields, obviously what's expected to happen regarding short term interest rates is the primary driver of, you know, for instance, um the two year yields. But you you always have this um this measure that's very hard to to assess um in real time regarding. a term premium that can reflect what's happening regarding inflation uncertainty.
00:07:58
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um But also, yes, fiscal dynamics um play a role. yeah We see it in emerging economies. The UK had its own recent experience in recent years. But but now, yes, it would appear that the fiscal dynamics have been playing some kind of role um in terms of what's happening in longer term interest rates.
00:08:17
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One of the uncertainties in the US to finish on is um is what the Fed is likely to do with ah interest rates. And
Federal Reserve's Stance on Rate Cuts
00:08:26
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there's been a lot of anticipations about Fed rate cuts and then putting back. And we've just had inflation data. Where where is the Fed now?
00:08:32
Speaker
Well, you're right. We have just had inflation data. And again, and you know, this is two months in a row for April and May that inflation surprised um on the downside. um So both headline and core inflation only rose by by point one.
00:08:46
Speaker
and we're still talking about core inflation that is at two point eight percent. It is a little bit too high. um and And maybe there are a few signs of a little bit of tariff effect on certain items, certain parts so of household goods, you know, for instance, toys and such like. And we know a lot of toys come from China.
00:09:04
Speaker
So um but but the inflation numbers have been relatively benign. I think, um you know, Christine Lagarde at the ECB meeting said that basically you can pack your bags for the beach now.
00:09:16
Speaker
You can wait for the summer. It's going to be a very quiet summer. It would appear it's going to be quite a quiet summer from the Fed as well. they They absolutely will make it clear that they can wait and see. Yes, they have a dual mandate, but they are still at full employment because the the non-farm payrolls release still showed that.
00:09:32
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unemployment at 4.2% and inflation, while it has not been as scary as some had had feared it might be on the back of tariffs because some of it's weighing on demand, some of it's weighing on profits and so only a small amount so far has gone through into prices, but maybe you know we will run out of inventories and you'll see it in June and you'll see it in July.
US Immigration Policies and Labour Market Effects
00:09:52
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So the Fed absolutely waiting to see and really they they will not be cutting interest rates until they see more slack emerging in the labour market in terms of the unemployment rate rising.
00:10:05
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But of course the other uncertainty there is not just whether there is lower demand for workers because I think there is lower demand for workers, we see that in the data, but you've got this enormous uncertainty regarding immigration in the US. s So even slower demand for workers might still mean that the unemployment rate does not rise as much as we are forecasting, um which is to to over 4.5% by the end of this year.
00:10:29
Speaker
Let's leave US
UK Fiscal Plans and Economic Growth
00:10:31
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shores. ah And firstly, on the UK, I mean, there's been a lot of headlines about this spending review. Does that matter? Should we be worried about it? What's your take on it? ah Well, you're right, there have been a lot of headlines about it because, you know, one of the big stories across Europe has been, you know, the need to spend more on defence.
00:10:48
Speaker
So we did get an announcement regarding how the future fiscal envelope will be spent. You know, we've already had the budget. We had the budget last year. um But this is when they set out the detailed spendings. So there will be higher spending um on the health service and there will be higher spending on defence.
00:11:07
Speaker
And then it suggested how things were going to be spent, which basically might cut, um in a large number of other sectors. but But I don't think um it is the major issue currently. Actually, you know, this week we've we've just had the the UK GDP release.
00:11:23
Speaker
And I think this is where there is a kind of global um element, it's just that we get monthly data from UK GDP. And we had an exceptionally strong first quarter, and you know, you the as the government likes to say, they're about the strongest in the G7.
00:11:39
Speaker
So quarter on quarter growth was very, very strong in the first quarter. In fact, I wrote a piece called The Front Loading Banks, because remember, the u US contracted in Q1, and large parts of the world surprised on the upside, China, Europe, um and the UK.
00:11:55
Speaker
So what we saw in the UK is in April, the the awful April payback, the end of the stamp duty um reduction. um So we had seen a lot of front loading, um not just in terms of ahead of US tariffs on the export side, um but actually on terms of house purchases.
00:12:12
Speaker
So we've seen the element there. We've also seen the impact of higher national insurance contributions for companies. So you've had a lot of tax increases um So you've had a kind of domestic payback as well as what a lot of the world will see, which is the global payback after the front loading banks in imports.
Global Trade Adjustments and Opportunities
00:12:31
Speaker
But actually, it's that latter point elsewhere that could potentially um be more important because this 90-day pause, if it does prove to be a 90-day pause, because there's now been a suggestion the reciprocal tariffs could come back in um a little bit sooner. We just don't know where we are with that.
00:12:47
Speaker
um but But we look at, for instance, the Taiwanese trade data for May. Taiwan's exports to the U.S. in May were up about 87 percent year on year.
00:12:58
Speaker
And I don't think anyone thinks that that will um continue. But it will be it will be some time before the trade data is telling us anything really sensible after this. Banks, the payback, the renewed pause.
00:13:11
Speaker
um it It really will be later in the second half of the year before we get a better idea on the trade front. I have a follow-up question on that vis-à-vis clients. But firstly, let's just um finish on on looking outside of the U.S. And you mentioned earlier Christian Lagarde and coming to the end of the rate-cutting cycle.
00:13:28
Speaker
Do we still see Europe as a beneficiary of the end of U.S. exceptionalism?
Europe and China's Economic Adaptations
00:13:32
Speaker
I realize it's a big question. We don't have a huge amount of time. But nevertheless, it is it is still something in people's minds. It's certainly a discussion point um in client meetings. you know we We have had this um overall market view for some time now of US exceptionalism. Growth has significantly outperformed.
00:13:51
Speaker
US companies, particularly the magnificent seven, have obviously made um extremely strong profits and have grown um very, very quickly. So I think, yeah, a lot of investors that have had a really big overweight in the US, they're not selling down everything.
00:14:07
Speaker
But they are perhaps thinking maybe they need to reduce their overweight um to some degree. So I think particularly regarding you know people that invest heavily in in in sovereign bonds, they are looking at other G10 and the eurozone is is the biggest um within that.
00:14:23
Speaker
um So you've obviously seen what's been happening in you know particularly southern Europe, Italy and Spain and and even Greece. You've also seen people maybe even looking at Japan and Australia um and and other other regions of the world where but you know the Eurozone's already seen big rate cuts.
00:14:40
Speaker
And what we expect to happen in the coming year with the tariffs in the US is that it will be deflationary elsewhere. So we're looking for a lot more rate cuts in Asia. um We think the ECB is probably done. It's possible we get one more, but it's certainly taking the summer off.
00:14:55
Speaker
um But because we don't look in a significant weakening, um then then, yeah, that a lot of investors are looking to reallocate a little bit more um to Europe, but also to other countries in the world as they gradually reduce their US overweight at least a little bit.
00:15:10
Speaker
ah Let's finish the sort of globe-trotting tour. um The story out of Asia is stabilisation in China. Well, in China, what we saw in the first quarter was a stronger than expected um GDP figure. And some of that was supported by stronger exports to the US in anticipation of tariffs. But of course, the tariffs on China took effect before Liberation Day, some of those initial tariffs.
00:15:35
Speaker
um So this is why it all happened a little bit earlier um in China. And also in China, we have seen the continued rollout of additional measures to support um domestic consumption.
00:15:48
Speaker
So, so far, we've only had the April data for trade, and it does look like um China exports to the US fell back. um It was much more resilient elsewhere. In fact, Chinese exports to Europe actually improved a little bit um in April.
00:16:02
Speaker
But if they're not going to be able to rely on exports quite as much, and and China is still in deflation, um then there will need to be further measures to support the consumer story um within China, even as they they seek to develop other export markets and to grow their their market share um in other economies um as well. But but certainly, yeah the the April activity data broadly, it slowed.
00:16:26
Speaker
It just didn't slow as much as had been feared on either investment um or or industrial production. That also surprised a little bit on the upside. So coming back to this question in terms of all your interactions with clients, you see the full range of wealth, corporate and
Investment Decisions Amid Global Uncertainty
00:16:41
Speaker
institutional. I'm particularly interested in your conversations with corporates.
00:16:45
Speaker
And ah the question here is, as you mentioned earlier in the conversation, they're all waiting on the data. They're waiting to see whether ah this tariff shock is really gonna come through. Is there a risk that they're waiting too long and they should be acting? are some of them already taking decisions on investments on the back of what's happened?
00:17:03
Speaker
It's a whole mixture really because what you've got to remember there are some structural stories still underway in the global economy. So you when you look at the outlook for the year ahead you've seen all the forecasts coming through from the OECD and the World Bank.
00:17:16
Speaker
um Everyone's been lowering their growth numbers. This is not good for global growth. But there will even cyclically be relative winners and relative losers. So even just on the cyclical front, some countries are are saying, OK, maybe things are going to be harder in terms of exports to the US, but where can we grow our exports? Where are the most rapidly growing Asian economies and you know big kind of economies with like large populations? So can they be excited about the Philippines or India?
00:17:46
Speaker
um Or indeed, you know what's happening, for instance, in in Latin America, where they are less exposed to to the US, some economies, and it's more about um the domestic stories. so So they are looking beyond US, particularly if they are in the export front.
00:18:01
Speaker
Broadly speaking, uncertainty is bad for investment and bad for employment and decision making. um ah everywhere, I think, in this world. But also when you're thinking about stories regarding AI and such like, you know, or building data centres, that doesn't come to a halt.
00:18:17
Speaker
yeah You know, just because global demand is going to be weaker. These are decade long stories where you have to keep investing. And that's where I think you're not seeing the story change.
00:18:29
Speaker
That's, I think, ah a positive note to end on. and And I hope we have a quiet summer, but I'm not entirely convinced that we will. But at least for now, thank you for joining us. Thank you very much, Piers.
00:18:43
Speaker
HSBC is
Gulf Economies Conference Announcement
00:18:44
Speaker
hosting a major conference in London next week on the Gulf economies. This covers Saudi Arabia, the UAE, Qatar, Kuwait, Oman and Bahrain.
00:18:54
Speaker
Ahead of the event, our team has published a comprehensive outlook for the region, laying out our macro, strategy and sector views. It also delves into key themes such as shifting demographics, investment in future cities and expanding trade connections.
00:19:09
Speaker
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00:19:25
Speaker
And if you've enjoyed today's edition of the Macrobrief, then please like and subscribe wherever you get your podcast.
00:19:34
Speaker
So that's a wrap. Thanks very much for listening, and we'll be back next week.
00:20:02
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.