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: Coming up this week, we assess the outlook for monetary policy on both sides of the Atlantic as the Fed and Bank of England step up their tightening cycles.
Speaker: And we look at how trade is continuing to be disrupted by the war in Ukraine.
Speaker: This podcast was recorded on Thursday, the 16th of June, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline Van Dyne.
Speaker: And I'm Piers Butler.
Speaker: It's been a week of upheaval in financial markets where almost all asset classes have suffered losses.
Speaker: Stock markets sold off, the S&P 500 entered bear market territory, and US bond yields surged.
Speaker: This has added to an already challenging backdrop as major central banks battle high inflation and slowing growth.
Speaker: In a moment, we'll hear about the Bank of England's latest meeting, but we begin in the U.S., where the Federal Reserve hiked interest rates by 75 basis points, its largest single increase since 1994.
Speaker: Let's hear from Ryan Wang, U.S. economist.
Speaker: Ryan, why a 75 basis point hike?
Speaker: Well, it really came down to inflation.
Speaker: In the days leading up to the meeting, we had a series of inflation readings.
Speaker: One was the May CPI that showed broad-based increases in food, energy, and core prices.
Speaker: And this is very interesting because food and energy prices in particular have the potential to feed to inflation expectations because these are purchases that are made frequently.
Speaker: And indeed, we also saw some surveys of consumer inflation expectations that may show a deterioration in those expectations in the days leading up to the Fed's policy meeting.
Speaker: So the committee decided to make a more aggressive move, raising the federal funds rate closer to what it considers to be a neutral and then eventually a restrictive level.
Speaker: So, Ryan, given all this, what's next?
Speaker: Well, the stickiness of inflation makes it likely that the Fed will continue to move its policy rate higher.
Speaker: What we learned from Fed Chair Powell yesterday was that most of the participants on the FOMC are thinking about a federal funds rate that could be as high as three and a half to four percent.
Speaker: And they expect to reach a restrictive policy rate sometime in 2023.
Speaker: So this will be important to see this interaction between higher policy rates, the impact on economic activity, the associated impact on labor markets and inflation.
Speaker: Any mention or discussion about recession risks?
Speaker: Well, a few questions that came up related to what is the FOMC seeing with respect to the strength of the consumer?
Speaker: And we have had some mixed evidence recently.
Speaker: Fed Chair Powell and his press conference even mentioned
Speaker: that some of the big box retailers are seeing a little bit of softness in their sales.
Speaker: And that could be related to higher prices for necessities like food and energy, squeezing out consumer budgets for more discretionary purchases.
Speaker: But overall, the Fed is maintaining a benign outlook for the economy.
Speaker: They do expect slower growth, but not a recession.
Speaker: And
Speaker: Our own view is that we could see the cumulative effects of monetary tightening, fading fiscal stimulus, putting the squeeze on real incomes that comes from high inflation, putting downward pressure on economic growth as we get into the turn of the year.
Speaker: So that's, I think, a key part of the calendar that we'll have to pay attention to.
Speaker: How is the economy holding up as we get through the end of this year and into early 2023?
Speaker: So Ryan, any particular data points to watch in the coming weeks and months?
Speaker: Well, I think the most important will still be the inflation readings that we're going to get over the next month.
Speaker: And away from the specific readings on CPI and PC inflation, we have to watch those measures of inflation expectations.
Speaker: A key one that was a driver for this meeting was that University of Michigan longer term metric.
Speaker: And then away from inflation, we also have to pay attention to the labor market.
Speaker: One factor is the very high level of job openings.
Speaker: FOMC policymakers repeatedly cite that there are two job openings per every unemployed worker in the United States, and so they're paying attention to how that metric evolves going forward.
Speaker: Brian, thanks so much for the update.
Speaker: Thanks, Aline.
Speaker: And it's not just in the US where we've had rate rises.
Speaker: The Swiss National Bank has just delivered a hawkish surprise.
Speaker: And here in the UK, the Bank of England has raised rates again.
Speaker: Liz Martin, senior UK economist, can talk us through the details of that decision.
Speaker: Liz, welcome to the podcast.
Speaker: Thank you.
Speaker: So the highest interest rate since 2009 from the Bank of England, and yet people are saying that they're a dovish outlier.
Speaker: Can you explain that?
Speaker: Yeah, sure.
Speaker: So I think in the wake of, you know, very intense inflation pressures, a very tight labour market, the upside risk to demand from the fiscal package from Rishi Sunak in May, some people had expected the Bank of England to go further at this meeting and to raise rates by 50 basis points.
Speaker: After all, as you said, the Fed has done 75, even the Swiss National Bank have done 50, the Australians, Canadians, New Zealand,
Speaker: all these central banks have been moving in 50 basis point increments.
Speaker: So there was speculation that the BOE might do the same.
Speaker: But in the end, they've continued with their softly, softly approach or what relatively looks like a softly, softly approach of 25 basis points per meeting, just three votes for that larger 50 basis point move.
Speaker: So even though they've raised rates at each of the last five meetings in the global context, that does make them look like, yeah, the dovish outliers.
Speaker: And so the next question obviously is, why are they taking this stance?
Speaker: And do you agree with it?
Speaker: Yeah, so I think they are trying to tread a very narrow pass.
Speaker: Of course, on the one hand, you raise interest rates to try and get inflation back under control.
Speaker: But when you raise interest rates, of course, you are bearing down on demand.
Speaker: And, you know, the UK economy is already slowing.
Speaker: We're seeing signs of that.
Speaker: We've got consumer confidence at lowest level on record.
Speaker: The survey is suggesting downturns.
Speaker: inactivity as well, no GDP growth since January.
Speaker: And so there is a question as to whether you do want to be raising interest rates into that environment.
Speaker: And I think the BOE is kind of more worried about that side of things than they are about inflation being sticky and lasting.
Speaker: As to whether we agree, well, I think only time will tell whether this kind of more gentle approach by the BOE or the more aggressive one by, for example, the Fed is the right way to pursue this.
Speaker: But it is a risk.
Speaker: You know, the Bank of England is hanging a more dovish approach, which arguably might not be enough to bring inflation back under control on this issue.
Speaker: forecast that inflation will come back under control thanks to slower growth, higher unemployment, heat coming out of the labour market and inflation coming back down in that way.
Speaker: If that doesn't work out, then of course the BOE could be subject to considerable criticism for not doing more on the Munch policy side.
Speaker: And is it fair to say that the Bank of England may also be relying on the fact that the markets are
Speaker: through their rate expectations are potentially doing some of the work?
Speaker: Yes.
Speaker: So the last time I looked and it's changing a lot at the moment, but the market implied interest rate was pushing up to about 3 percent by the end of this year.
Speaker: So the market believes that the BOE is going to do considerably more tightening over the next kind of six months.
Speaker: And that tightens monetary conditions in its own way.
Speaker: You know, the swap rates feed through to mortgage rates, and that does some of the work without the Bank of England actually raising rates per se.
Speaker: And when the Bank of England puts together its forecast, it conditions them
Speaker: on these market implied interest rates.
Speaker: And it says, well, look, actually, even at where they were in May, which is some way lower than where they are now, these conditions are too tight and will actually result inflation being quite some way below the inflation target.
Speaker: three years out.
Speaker: In fact, they were forecasting 1.3% three years out for CPI inflation.
Speaker: And that's the biggest forecast undershoot since 2009.
Speaker: So the BOE is kind of saying actually, yeah, some of the market conditions are doing its work for it.
Speaker: Of course, that won't last forever.
Speaker: If the BOE were to disappoint relative to those market expectations, they might shift back again.
Speaker: But for now, yeah, I think that is part of the story.
Speaker: Liz, thank you very much.
Speaker: Thank you.
Speaker: So we've heard a lot today about high inflation and a key contributor to that has been the Russia-Ukraine war.
Speaker: Shanela Rajanayagam, our trade economist, has been looking at how the conflict has been impacting trade flows.
Speaker: So Shanela, countries around the world have implemented further restrictions on Russian products.
Speaker: What's the latest, particularly around oil?
Speaker: That's right.
Speaker: So more and more countries continue to impose trade sanctions against Russia, and notably the EU recently agreed to ban imports of Russian oil.
Speaker: Now this ban will apply to seaborne oil only, which accounts for around two thirds of the bloc's total oil imports from Russia.
Speaker: The rest of the oil that the EU gets from Russia is sent by a pipeline, and that will be temporarily exempted, largely due to pushback from Hungary.
Speaker: There are also various other temporary derogations for some other member states.
Speaker: And all this ban and the announcements made, oil prices climb higher, although the embargo will be phased in over the course of this year.
Speaker: So it will take about six to eight months.
Speaker: And this has basically raised the question about what other levers the EU could use to put the pressure on Russia.
Speaker: And one such proposal is that it could potentially look to levy tariffs on Russian oil.
Speaker: And the European Commission did recently say that it does stand ready to do this should any member state not fully enforce the embargo on oil by the end of this year.
Speaker: How have logistics been affected by the war?
Speaker: So logistics disruption continues to mainly constrain Ukrainian wheat supply.
Speaker: So normally around 80% of Ukrainian grain exports are transported through the country's southwestern ports.
Speaker: but these are currently blockaded.
Speaker: And as a result, this is leaving up to 25 million tonnes of wheat currently stuck in Ukraine.
Speaker: And the situation could get worse if a solution isn't found quite quickly.
Speaker: There have been some efforts to try and move Ukrainian grain via alternative modes of freight, so through road and rail,
Speaker: But the capacity that needs to be moved makes this quite challenging.
Speaker: There are also some other challenges as well.
Speaker: For example, there are differences in the train tracks, which means that the Ukrainian grain would have to be loaded and then unloaded and reloaded onto other trains when it gets to the border with some of the other European countries.
Speaker: So really what is needed right now is some sort of food export corridor.
Speaker: All the talks between Russia and Ukraine haven't really yielded anything so far.
Speaker: So how is this affecting food protectionism?
Speaker: So given that food supply has been constrained, prices for certain agricultural commodities keep rising.
Speaker: This has led to an increase in food trade protectionism.
Speaker: Currently, over 20 countries are implementing some sort of ban on food exports.
Speaker: And actually today, a greater share of global trade in terms of calories is now impacted by these restrictions than during the 2008 food price crisis.
Speaker: And the risk really is that the longer these types of sanctions remain in place and the constraints on supply remain, the more countries will continue to implement food restrictions.
Speaker: Just recently, notably India, which is a large producer of both wheat and sugar, it moved to ban its exports of these products.
Speaker: And this has raised concerns about what other products could be targeted by food export restrictions.
Speaker: Rice has been floated and that could certainly cause a lot of ripple effects if India were to ban exports of rice, although for now the government has said that they're steering away from that.
Speaker: And how are all these issues impacting trade flows?
Speaker: So some trade flows have started to reconfigure already.
Speaker: When we look at the April trade data, for example, trade with Russia from the US, UK, Japan, South Korea, they were all down in double digits year on year.
Speaker: Chinese exports of machinery and electrical equipment have also declined, and this is largely due to the Western sanctions and
Speaker: also some self-sanctioning by businesses.
Speaker: On the other hand, China's oil imports from Russia continue to increase, largely as it continues to buy up discounted Russian oil.
Speaker: So for example, Russian export volumes of oil to China was up 90% in April and May combined compared to the same period a year before.
Speaker: And the similar stat for India is over 500%.
Speaker: So we are starting to see some shifts in trade flows.
Speaker: And again, the longer these types of sanctions remain in place, the war continues, there could be more shifts to come.
Speaker: Shanela, thanks very much.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Ryan Wang, Liz Martins, and Shanela Rajanagam.
Speaker: Thanks very much for listening.
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.
