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.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we assess the path for monetary policy on both sides of the Atlantic, following hefty rate rises by the Fed and the Bank of England.
Speaker: And we look at why China's economic recovery might be more gradual than expected.
Speaker: This podcast was recorded on Thursday, the 22nd of September, 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 coming to you from the US, where this week the Federal Reserve raised policy rates by 75 basis points and reiterated their hawkish outlook for future increases.
Speaker: Let's get the thoughts of Ryan Wang, US economist.
Speaker: Ryan, welcome to the podcast.
Speaker: Thanks, Piers.
Speaker: Pleasure to be here.
Speaker: The FOMC met yesterday and, as anticipated, raised rates by 75 basis points, but the markets clearly didn't like the dots.
Speaker: Can you explain to us what that means?
Speaker: That's right.
Speaker: The FOMC raised the federal funds target range by 75 basic points for the third meeting in a row, but it was those projections that got the attention.
Speaker: The dots are the forecast from the policymakers about what they expect future
Speaker: policy rates to be.
Speaker: And particularly for the end of this year, that's very concrete guidance because there's only two more policy meetings.
Speaker: And essentially, the median projection of the policymakers is that the Fed funds rate will need to move up by another 125 basis points over the course of those two meetings in November and December.
Speaker: Do you get a sense that the market was more bullish than that in terms of anticipations?
Speaker: Well, this is a function of what's been happening with the economic numbers, particularly on the inflation side.
Speaker: There hasn't been any significant slowdown in the inflation pressures coming through.
Speaker: And this is what's prompting these successive waves of upgrades to policy rate projections and downgrades to the growth outlook and a more pessimistic outlook for inflation.
Speaker: You know, what's going to be key, I think, is what happens to the labor market, which has continued to show strong job creation so far this year.
Speaker: That is one of the factors that's contributing to high and elevated sticky inflation.
Speaker: So on the back of this, Ryan, you've updated your own forecast.
Speaker: Can you run us through what they are now?
Speaker: So we're expecting continued rate hikes over the next three policy meetings of a larger magnitude than we previously forecasted.
Speaker: So we're looking for a 75 base point rate hike in November, 50 basis points in December, and a final 25 base point rate hike in February of 2023.
Speaker: That would take the federal funds target range up to four and a half to four and three quarters percent.
Speaker: So that forecast is 50 basis points higher than our previously projected peak for Fed funds.
Speaker: And how much confidence do you have in that estimate?
Speaker: In a sense, do you sense we're in an environment where, again, it is a lot of uncertainty regarding these economic forecasts?
Speaker: Or do we feel that we've not got to a sense of where rates are going to peak?
Speaker: Well, what I would point to is not just the inflation numbers, which will be crucial, but also this configuration of labor market data.
Speaker: And so in particular, the Fed thinks that labor market conditions may need to soften for inflation to fall.
Speaker: There's three indicators in particular that I would watch.
Speaker: I'd be looking at the level of job openings, which still remains very, very high.
Speaker: Looking at unemployment, which we do think will be increasing over the course of the next year, and also wage pressures.
Speaker: wage growth is running at a level that the Fed thinks is too high to be consistent with 2% inflation.
Speaker: Ryan, thank you very much for joining us today.
Speaker: Thanks a lot, Piers.
Speaker: So that's the view from the US.
Speaker: And in the UK, the Bank of England also delivered a large rate rise this week.
Speaker: This comes ahead of Friday's mini budget from new Chancellor Kwasi Kwarteng aimed at tackling the cost of living crisis.
Speaker: Liz Martens is our senior UK economist.
Speaker: Liz, welcome to the podcast.
Speaker: Thanks very much.
Speaker: So tell us what the Bank of England did.
Speaker: So the Bank of England raised rates by 50 basis points to 2.25%.
Speaker: That's in line with what we and the consensus of economists had expected, but it stopped a bit short of what the market had been pricing, which was a pretty strong chance of a larger 75 basis point move, which of course we've seen from other central banks like the Fed.
Speaker: and the ECB.
Speaker: Now interestingly we saw a three-way split on the Monetary Policy Committee.
Speaker: So three members thought that there should have been that larger move for 75 basis points.
Speaker: A narrow majority of five went for the 50 and then the new member Swati Dingra came in and immediately dissented in a dovish direction voting for only 25 basis points.
Speaker: So there's a bit of a range of opinions on the committee but ultimately that narrow majority prevailed for
Speaker: 50 basis points.
Speaker: Now, they also launched active quantitative tightening or QT.
Speaker: What's that all about, Liz?
Speaker: Yeah.
Speaker: So the bank's been doing passive QT, in other words, not reinvesting the bonds in its portfolio as they mature.
Speaker: They've been doing that for a while, but they've now started actively or they're about to start rather actively selling bonds into the market.
Speaker: That will start on the 3rd of October.
Speaker: It was all pre-flagged.
Speaker: There'd been some
Speaker: Some people had speculated they might delay it, but they have gone ahead and they voted 9-0 to do that.
Speaker: Now we don't know actually what the impact of that will be, particularly in conjunction with much stronger government debt issuance.
Speaker: So that's quite experimental and really the BOE is a global pioneer of this policy.
Speaker: A lot of central banks have done the passive side of QT, but the BOE is really the first to sell back into the market.
Speaker: So it's going to be quite interesting to see how
Speaker: that plays out.
Speaker: Liz, what do today's events tell us about what to expect going forward?
Speaker: Well, I think it is a hawkish shift from a central bank that has been relatively dovish thus far.
Speaker: First of all, there was, of course, the vote.
Speaker: People now voting for that 75 basis point move.
Speaker: but also the rhetoric and there were two points the Bank of England highlighted here.
Speaker: One, you've already mentioned the fiscal event that we've got coming in the UK at the time of recording and the time the Bank of England vote, we didn't have details of that.
Speaker: But the Bank of England did allude to the fact that it will support demand and potentially be inflationary.
Speaker: And they also alluded to the fact that the labour market has been stronger than they were expecting at the time
Speaker: of their last forecast round and that too might ultimately be inflationary.
Speaker: So it is a hawkish shift and our own forecast is for only two more rate rises in this cycle and then a pause.
Speaker: I think realistically the news from today's meeting does suggest upside risks to that.
Speaker: Liz, thank you.
Speaker: Thank you.
Speaker: There's been plenty of central bank action in other parts of the world too, with rate rises in Sweden, Switzerland, Japan, the Philippines and Indonesia.
Speaker: You can read further analysis on our website, research.hsvc.com.
Speaker: Before we move on, we'd like to invite you to join HSBC's Global Emerging Markets Forum, which is in full swing online and running until the 30th of September.
Speaker: Policymakers, thought leaders, corporates and our team of experts here in global research will be sharing their views on the outlook for emerging markets.
Speaker: If you're interested in attending, please contact your local HSBC representative for more details.
Speaker: We finished this week in Asia, where economic headwinds have continued to weigh on China's growth outlook, leading our economics team to cut their GDP forecasts.
Speaker: Jing Liu is our chief economist for Greater China, and she spoke to Graham Mackay earlier.
Speaker: Jing, welcome to the podcast.
Speaker: Thanks for having me here.
Speaker: So you've downgraded your forecast for Chinese GDP for this year and next year as well.
Speaker: Give us a sense of what the new numbers are.
Speaker: Right.
Speaker: So we actually downgrade this year's forecast from 4.1% to 3.5%, and next year from 5.8% to 5.2%.
Speaker: And the key drivers of those downgrades are?
Speaker: The headwind seem to persist longer than we thought, and then the growth rebound happens later than we thought or more gradually.
Speaker: The two headwinds, many, first is a COVID flare up and then, you know, of course, the corresponding restrictions.
Speaker: The second one is ongoing housing market weakness.
Speaker: Right, both issues that we've been speaking about for quite a while now.
Speaker: In terms of COVID, just give us a sense of where we are right now in China and how that is influencing your thinking on the economic impact over the rest of the year.
Speaker: So if we look at the COVID flare ups recently, I think, you know, it's fair to say starting July, August, we have seen many different regions in China observe, you know, different kind of scale of outbreak.
Speaker: And in China standard, it has led to the lockdown in the second mega city, Chengdu of Sichuan for about 18, 19 days.
Speaker: That's a city of 21 million people, is that right?
Speaker: Yes.
Speaker: And of course, correspondingly, we have seen more areas identified as either high or medium risk.
Speaker: And in China standards, once an area is identified as high or medium risk, then there will be more stringent restrictions.
Speaker: And you can imagine those restrictions will weigh on
Speaker: different things from consumption to retail to many other things and in comparison with the outbreak we saw earlier in april and may actually in terms of the number of high and medium risk areas
Speaker: and also in terms of their share of GDP, it's roughly the same as in the April and May outbreak, and the number look kind of staggering about 30 to 35 percent of the GDP represented areas have been affected by COVID restrictions.
Speaker: However, this time around we have seen them doing a better job in terms of ensuring
Speaker: production as well as logistics are running as smoothly as possible.
Speaker: So the drag on GDP growth and, you know, as we see from the economic activity data have been much less than before.
Speaker: But that being said, you know, as you can imagine, it still weighs on the sentiment of the household, of the corporates, and at the same time, the consumption recovery has been quite sluggish.
Speaker: Understood.
Speaker: OK, let's talk about the housing market next and property as a whole.
Speaker: Where are we at the moment and what's the economic impact likely to be for this year into next?
Speaker: The housing market kind of weakness continues.
Speaker: If we look at the housing sales nationwide or the property investment or some other metric, basically it still points to the contraction.
Speaker: That being said, we start to see more and more measures being rolled out at different levels, trying to stabilize the housing market.
Speaker: But so far, we haven't seen a holistic solution yet.
Speaker: And because of that, most of the measures managed to buffer the slowdown, but haven't been able to engineer a rebound yet.
Speaker: So I think putting together, as we said in an earlier report, basically our base case scenario this year would be a drag on the overall GDP growth.
Speaker: All right, so two pretty sizable headwinds there.
Speaker: But if we were to focus on the positives for a moment, 3.5% growth for this year, 2022.
Speaker: What do you see driving that?
Speaker: We have seen actually infrastructure investment picking up quite substantially this year.
Speaker: And given different support, policy support, funding support from central government as well as the local government, this will
Speaker: continue to drive the growth.
Speaker: And also for the manufacturing investment, that is a longer term theme of manufacturing, upgrading, etc.
Speaker: It also continues to outperform the overall investment.
Speaker: And then the investment-led rebound will be our theme for this year and also into next year.
Speaker: And I think it's important to emphasize the monetary policy also continue to be very accommodating.
Speaker: Jing Liu, thank you very much indeed for your insights.
Speaker: Thank you so much.
Speaker: So that's it for today.
Speaker: Thank you to our guests, Ryan Wang, Liz Martins and Jing Liu.
Speaker: And thanks to all of you 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.
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