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: Hello, I'm Aline Van Dyne and welcome to The Macro Brief, this week coming to you from our studio in New York.
Speaker: The International Monetary Fund and World Bank annual meetings took place in Washington, D.C.
Speaker: last week.
Speaker: These events bring together thousands of politicians, policymakers, businesses, investors and some of HSBC's own economists and strategists to discuss the state of the global economy.
Speaker: So what was the prevailing mood?
Speaker: Well, we have a stellar lineup to give us insight.
Speaker: I'm joined by Janet Henry, our global chief economist.
Speaker: Delighted to be here, Aline.
Speaker: Murat Olgun, global head of emerging markets research.
Speaker: Thanks for the invite, Aline.
Speaker: Paul Mackle, global head of FX research.
Speaker: Thank you very much.
Speaker: And Fred Newman, our chief Asia economist, and also, of course, co-host of our sister podcast, Under the Banyan Tree.
Speaker: Glad to be here, Aline.
Speaker: So let's start with the big picture.
Speaker: But first, we're having this discussion the week before the U.S. election.
Speaker: The outcome, of course, will affect the global outlook, but about which we can't speculate.
Speaker: So, Janet, can you kick off by summing up the economic backdrop and the key issues discussed at the meetings?
Speaker: Yes, I'd be happy to, Aileen.
Speaker: You've got to remember, before we went to Washington, the market had a real reassessment in terms of its view of the US because, you know, back in August time, it was real fears of the US hard landing.
Speaker: And then we had that 50 basis point cut from the Fed.
Speaker: But then we had the September payrolls release with stronger than expected jobs growth, higher than expected wages and a fall in the unemployment rate.
Speaker: So suddenly the view on the US was one of no landing.
Speaker: So the real questions were really, you know, what does this mean for the Fed in terms of the future course of policy easing?
Speaker: And as you've already mentioned, the consequences of the outcome of the US election and what that means for policy easing.
Speaker: through the course of 2025.
Speaker: That was really the main theme.
Speaker: You would not believe how many discussions there were or any conversation that ended up in terms of speculation on the US electoral outcome.
Speaker: And then, of course, the other topic was China.
Speaker: Not just the detail of the China stimulus, how big would the fiscal stimulus be, but whether it was going to be a whatever it takes moment.
Speaker: And that, of course, meant would it be big enough to single-handedly lift the world trade cycle
Speaker: and lift Germany in particular out of recession.
Speaker: So Janet, before we go into that, and Fred, it'd be great to hear from you about that, just to check.
Speaker: So has the narrative really shifted away from concerns around inflation?
Speaker: Is that still kind of the talking points?
Speaker: Because probably a year ago, certainly two years ago, that would have dominated the discussion.
Speaker: Well, the inflation risks are coming back.
Speaker: You know, I think what shifted was that in August it was all about growth.
Speaker: We'd seen that rise in unemployment rate from its trough, the breaking of the so-called SARM rule, where unemployment had risen by half a percent.
Speaker: But now that the market has scaled back its expectations regarding Fed rate cuts,
Speaker: it's actually now become a bit more balanced because the labour market now seems to have been, based on that latest release, a little bit firmer.
Speaker: Some of the inflation risks are coming back into discussion.
Speaker: Obviously, oil prices have recently softened a little bit because we know that demand has weakened and supply is growing quite strongly.
Speaker: But we've still got some geopolitical uncertainties and clearly under some of the election outcome uncertainties,
Speaker: Relating to 2025, depending on who is elected and whether they get a clean sweep, it could result in a broadly inflationary backdrop.
Speaker: So no, inflation did come up in a lot of the discussions, no longer just about the downside risks to growth and the risks to the US labour market.
Speaker: So Fred, will changes in China policy contribute to a more inflationary backdrop once again?
Speaker: I think that's actually unlikely.
Speaker: So we're still a bit in waiting and see mode here because on November 8th, we have indications that China will likely announce a fiscal stimulus number, and we're not quite clear how large this will be.
Speaker: But all the indications point to the fact that China may actually put a floor on the growth for several years rather than try to really stimulate the economy in the next few quarters to generate that inflation impulse.
Speaker: So this is good.
Speaker: This means we kind of reduce the risk of a hard landing in China.
Speaker: We get more steady growth.
Speaker: But it's not enough necessarily to contribute to a global inflation impulse.
Speaker: In fact, if you look at how commodity prices have traded in the last few weeks, they're still drifting lower.
Speaker: That might reflect a little bit concern over the Chinese demand outlook.
Speaker: we also still see downside pressures on goods prices.
Speaker: And, you know, China is exporting a lot of goods at very low price points.
Speaker: And we certainly see that dragging down inflation in many parts of the world.
Speaker: But I wanted to ask, actually, Janet, you mentioned that inflation is still a topic of concern, but you mean probably more services inflation.
Speaker: Is that right?
Speaker: Yeah, that certainly is, particularly with regard to the eurozone.
Speaker: But it is quite interesting when you compare the US with the eurozone, because actually core goods prices are falling more in the US.
Speaker: They're lower than they were in the eurozone, but they're nowhere near as low as they are in the US.
Speaker: So certainly I think it's the price discounting that have helped to allow core goods spending in the US to continue to recover.
Speaker: But of course, in the eurozone, consumer spending has remained remarkably subdued.
Speaker: despite improving real incomes and tight labour markets.
Speaker: So, you know, we also need to think about how inflation impacts on growth as opposed to how growth impacts on inflation.
Speaker: I was just going to add one thing, though, because in terms of takeaways from the IMF meetings last week, Murat, you hosted a lot of EM central banks, officials and also finance ministry officials.
Speaker: What was your thinking with regards to inflation?
Speaker: Because they did sound a little bit more cautious.
Speaker: Yes, thank you, Paul.
Speaker: No, we actually had like record number of investor roundtables bringing policymakers and investors, institutional investors together.
Speaker: And, you know, we kind of summarized in a piece yesterday the mood, the feeling and the key question discussion topics.
Speaker: And this was exactly one issue, aside from obviously the impact of U.S. elections in China.
Speaker: That question probably has crept up pretty much in every meeting.
Speaker: Not that there's a fear of inflation, but why is inflation so sticky and persistent to a much more visible downtrend?
Speaker: And pretty much every policymaker agrees that there is this component of sticky service inflation.
Speaker: And when you dig, there are obviously some sort of common explanation that Janet said, tight labor markets, decent wage gains, lack of productivity growth, fiscal expectations, et cetera.
Speaker: But there are certainly some country-specific issues as well.
Speaker: But yes, that was actually an important component of the discussions, stickiness in particular in service inflation.
Speaker: It's not only a developed world issue, definitely emerging market issue as well.
Speaker: Listening to all of you, does that mean that really this expectation that we have much more to run on the easing cycle might be a wrong, globally a wrong expectation that actually there's a lot of sticky inflation?
Speaker: What would you think, Janet?
Speaker: Well, I think, yeah, there are some risks that are not just of sticky inflation, but I think, you know, whether people believe it's sticky or not, most people agree that we are in a more volatile era for inflation.
Speaker: And some of this does relate to actually the non-core inflation, because it was interesting in that Mexico roundtable that you hosted, Murat, they did talk about, I remember the deputy governor mentioning the fact that, you know, the frequency of extreme weather events was leading to more volatile food inflation.
Speaker: Are we seeing that more broadly across the emerging markets?
Speaker: For sure.
Speaker: I mean, you know, the uncertainty component is definitely there.
Speaker: But coming back to Fred's question, there are actually examples in the emerging world universe where the monetary policy cycle has already turned.
Speaker: I mean, there aren't too many, but Brazil has hike rates and more rate hikes are expected.
Speaker: And arguably, you know, we've seen Central Eastern Europe delivering most of the cuts already.
Speaker: I mean, there's perhaps some more room in some individual countries.
Speaker: Maybe Asia is sort of, it has been a laggard.
Speaker: Inflation hasn't been a major problem.
Speaker: Now they have some room to cut
Speaker: But yes, you might argue, you know, markets will probably have to recalibrate their thinking about monetary easing, which is what they're doing, which they're already doing, by the way.
Speaker: And that's probably true for EM as well.
Speaker: We're also so accustomed to think that these tightening and easing cycles are synchronous.
Speaker: But actually, we may be moving into a period because of these risks on inflation that it becomes increasingly desynchronized.
Speaker: I mean, you can see how the market is speculating with regards to the Fed versus the ECB.
Speaker: but still very much in the emerging world too.
Speaker: As you said, Brazil is different compared to how central European central banks could be evolving.
Speaker: And Paul, how is that playing out in terms of the markets?
Speaker: Because obviously, lack of synchronization in these cycles presumably has quite a big impact in the global FX markets.
Speaker: Well, to us, we think it's clear and we've been saying it for quite some time, but it plays to the strong dollar view.
Speaker: And if the Fed is going slower than many other central banks, then there's no great reason for the dollar going down, especially if some of the uncertainties that Janet's been highlighting with regards to global growth are also playing into this kind of more cautious environment.
Speaker: So overall, I still think that the dollar is going to be a more resilient currency than what many are thinking as we go into 2025, irrespective of the US election, by the way.
Speaker: I mean, if we didn't have it this year, I'd still be saying that the dollar is going to be in the driver's seat.
Speaker: I feel like Paul opened up the U.S. election issue, but I wanted to just before we maybe go to that, ask, you mentioned that the strong dollar is an implication here, but is there also a sense that the coal movements around currencies is no longer strong?
Speaker: If we have these idiosyncratic stories, some central banks hiking, others cutting, do you see that in the data?
Speaker: Is the coal movement kind of weakening?
Speaker: I think that's a very good point.
Speaker: And the short answer is yes.
Speaker: There have clearly been some currencies that have held up very well in a strong dollar environment.
Speaker: You know, back in 2021, 2022, a number of Latin American currencies performed very well alongside a strong dollar because the central banks were seen doing the right thing with inflation.
Speaker: And then more recently, what's happening with the Turkish Lira and also the South African Rand.
Speaker: So, you know, we can't just assume that the dollar is going to be strong versus every currency and outperform it across the board.
Speaker: I don't think we have the conditions for that is what I'm trying to say.
Speaker: It can be much more idiosyncratic.
Speaker: And if those positive stories are coming through, those currencies should be benefiting.
Speaker: Yeah.
Speaker: And I think perhaps there's one major underlying issue that we haven't touched so far, which probably is influential with all these sort of macro cross currents.
Speaker: Maybe going back to the fiscal situation, especially in the developed world, including the U.S., how loose this has been and what sort of an impact it's making on growth and inflation outlook.
Speaker: That has been a key discussion in Washington as well.
Speaker: It certainly has been.
Speaker: And, you know, people tend to always start with the US or if they start with another economy that's facing some major fiscal challenges, they then say, oh, what about the US?
Speaker: But of course, the US is still the world's reserve currency and the closest thing the world has to a risk-free asset.
Speaker: But we saw, for instance, you know, in 2023, the fact is the budget deficit widening, you know, helped to drive growth.
Speaker: It added half a percent
Speaker: to US inflation.
Speaker: It's just that if there's any volatility or problems regarding the US and it impacts on the US Treasury market, it's a global story.
Speaker: Whereas, of course, if you get fiscal concerns in Europe or an emerging economy, you buy the US.
Speaker: So yeah, for all of the uncertainties related to the US fiscal position, it still seems to get some kind of safety for now by the fact that it's still the worst reserve currency.
Speaker: In terms of the US election, it'd be great to hear from each of you kind of what policy change you think will be the most important one to keep an eye out for.
Speaker: So is the fiscal impact the biggest issue for you, Janet?
Speaker: Well, the fiscal is going to be the big challenge.
Speaker: But even in terms of rolling over the tax cuts that are due to expire, that's more a 2026 story.
Speaker: Also, that's the elements that take the longest to get through.
Speaker: So the most immediate policy response will be what happens on the trade front, because you can in the first month or two get some very definite measures in terms of trade tariffs, depending on the outcome.
Speaker: Without a doubt, yes, we need to be concerned about what happens on the immigration front.
Speaker: Of course, investors will focus on what happens on the deregulation side or lack thereof.
Speaker: Do you all agree, tariffs?
Speaker: Well, in Asia, we're watching three things.
Speaker: Tariffs, tariffs, tariffs.
Speaker: Okay.
Speaker: That's really it.
Speaker: That's pretty clear.
Speaker: I think what matters will be the sequencing of policies.
Speaker: I fully agree that tariffs are absolutely going to be very meaningful for...
Speaker: for markets, but it's hard to understand which administration will prioritize certain things first.
Speaker: Maybe tariffs aren't at the top of the list of what to impose or to roll out.
Speaker: What if it is about deregulation, as Janet had suggested, and what that could mean for the U.S. economy from a productivity standpoint?
Speaker: So I think the sequencing is very, very important in this sense.
Speaker: Yeah, I'd say from what I said, sort of
Speaker: For the big picture EM view, I would say all of the above.
Speaker: I mean, all these policies that I mentioned during campaign trails from fiscal to immigration to trade policy, tariffs, et cetera, they all have an impact or not on the U.S. economy.
Speaker: What happens to the U.S. economy has an impact on global financial markets through financial conditions and risk appetite.
Speaker: I would say all of them are important, but probably if I were to summarize it, what happens to the U.S. growth and inflation mix?
Speaker: And if there is any read across for the monetary policy,
Speaker: will matter because to the extent the Fed is able to cut rates, it gives the room for the emerging market center banks to tag along.
Speaker: And as my colleagues have mentioned, there is a re-evaluation, re-assessment of the whole path, which is important for emerging market monetary policy.
Speaker: Although, of course, Moura, there is one large emerging economy which you've highlighted where the outlook for policy is seemingly immune to what happens regarding the Federal Reserve and more about domestic policy.
Speaker: Is that fair?
Speaker: There are a few.
Speaker: We're going to use it more like a country-specific story, bottom-up stories.
Speaker: Look, you know, we've seen that some emerging markets who are, who have a domestic narrative and are delivering credible monetary and fiscal policies, they have been more in favor by investors.
Speaker: And we've seen it more recent in the EMEA universe, likes of Turkey, South Africa, Egypt, Poland.
Speaker: They do have their own domestic narrative and they have credible monetary fiscal policies and investors are showing bigger interest and more sort of a positive stance when it comes to these countries.
Speaker: But I think what you mentioned, and I think Paul mentioned as well, and Janet, it's about the nuances here, right?
Speaker: We have obviously a big consequential election coming up, but it's the idiosyncratic stories.
Speaker: It's the implementation of policy.
Speaker: It's nuances around what type of tariffs, when they're coming, that all matter.
Speaker: So it's difficult with one big brush to sort of say this is what's going to happen.
Speaker: I think a lot depends really on the nuances and details over the coming months.
Speaker: Well, I hope that we get some clarity next week, but we'll have to wait and see.
Speaker: Definitely would be great to have you all back to discuss the post-election scenario.
Speaker: In the meantime, thank you so much.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Great pleasure.
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Speaker: James Pomeroy, global economist, will be talking about the implications of what seems to be an enduring post-COVID boom in travel and tourism.
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Speaker: So that's all from us today.
Speaker: We hope you enjoyed the discussion.
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