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.
Speaker: And now onto today's show.
Speaker: The following podcast was recorded for publication on the 22nd of February 2024 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: And don't forget that you can follow this weekly podcast on Apple and Spotify, or wherever you get your podcasts.
Speaker: Just search for The Macro Brief.
Speaker: Hello, I'm Aline Van Dyne and welcome to the Macro Brief.
Speaker: This week coming to you from New York.
Speaker: On today's podcast, we're looking ahead to the US elections in November.
Speaker: Now these may still be eight months away, but already there are clear expectations of a Biden-Trump presidential race.
Speaker: On today's podcast, we're looking at key issues, including the state of the race, the role of Congress, and implications for the Federal Reserve and the US dollar.
Speaker: I'm joined in the studio by US economist Ryan Wang and head of FX strategy in the Americas, Dara Ma.
Speaker: Welcome to you both.
Speaker: Ryan, let's start with a quick summary of the state of play.
Speaker: Well, I think what we can say right now at this stage in the 2024 US election year is that there are broad expectations for a rematch in the presidential race between President Joe Biden and former President Donald Trump.
Speaker: And we can say there are good reasons for this, these expectations, we have already begun the
Speaker: primary season and the early results are that indeed those two candidates are leading by a considerable margin in the races that we've seen so far.
Speaker: Now, it's clear we haven't even reached so-called Super Tuesday, which is on March the 5th, a key date in previous election cycles where
Speaker: a majority or it's the single biggest day for primary, so to speak.
Speaker: But at this point, we might almost say that the bigger surprise over the next seven or eight months would be if we don't see a rematch in the presidential race.
Speaker: Dara, we've been here before.
Speaker: Four years ago, we also had a runoff between Biden and Trump.
Speaker: But let's shift to the policy side.
Speaker: Previously, trade was very much a focus.
Speaker: Trade tensions were very much a market concern.
Speaker: Is this already in focus?
Speaker: Yeah, it's already a talking point.
Speaker: As you say, we have been here before in terms of this potential runoff.
Speaker: But I think where people think about trade is really in the context of President Trump's, obviously, first round, if you like, as president, where that was the center point of his policy.
Speaker: There's no indication that he's less in favor of that approach right now.
Speaker: And those who seem to be kind of
Speaker: speaking towards that policy in the background, have ventured various possibilities, including a 10% tariff on import tariff across the board and others that we see cited in Bloomberg or Wall Street Journal's suggestions of potentially a 60% tariff on imports from China.
Speaker: So look, these are all quite eye-catching numbers.
Speaker: I guess the advantage we have this time around is
Speaker: We more or less know how the currency market at least will react, which is how previously it was with a stronger dollar, which is what economic theory would suggest should be the case.
Speaker: But sometimes still quite remarkable that currency traders acknowledge that and behave in that way.
Speaker: So I think that would be the expectation.
Speaker: Obviously, the other thing we have to bear in mind, there'll be a big focus on US-China in this context, but it's not...
Speaker: just, if you like, a bilateral story.
Speaker: The US-EU relations, I think, will be also a key pinch point for possible trade tensions.
Speaker: And then we have the whole discussion about trade diversion, near sourcing, supply chains, all these other potential complications.
Speaker: So, yeah, it's an interesting one, I guess, to finish because also it's one the US president has control over.
Speaker: He doesn't actually need Congress to kind of rubber stamp all of those kind of trade initiatives.
Speaker: Let's dig into that a little bit more because if there is a clean sweep, which means that Congress is controlled by the same party as the president, that opens up certain possibilities in terms of policy change.
Speaker: But Ryan, can you explain what powers the president has if there isn't a clean sweep?
Speaker: Well, yes, this is a really relevant question, and I think it is a key reason why we're talking so much about trade.
Speaker: It's because when we talk about tariffs, the president, the executive branch, has some existing authorities based on existing legislation.
Speaker: And so this goes to that second key point, which is that any legislation, any new legislation,
Speaker: requires the approval of Congress, whether that relates to fiscal matters or really anything that affects new law.
Speaker: So that is the distinction.
Speaker: Aline, you mentioned this possibility of a clean sweep, which we do think has important policy relevance.
Speaker: I think it is important to distinguish between three different scenarios, a clean sweep for the Republicans, a clean sweep for the Democrats, and really a continuation of what we have currently, which is divided government.
Speaker: In divided government, you would expect that the scope and scale of new legislation, again, fiscal or otherwise, would be more limited.
Speaker: And there's plenty of evidence that that is the situation right now where legislation across a wide variety of policy areas
Speaker: is facing some challenges in reaching enactment.
Speaker: One of the reasons why the so-called clean sweep scenario is potentially so impactful from a policy perspective is because it opens up this possibility of legislation through so-called budget reconciliation.
Speaker: Now, in theory, this only pertains to new legislation that produces a fiscal change.
Speaker: But the key feature is that a party that does control the House of Representatives, the Senate and the White House may be able to push forward its policy priorities with only a slim majority in the Senate.
Speaker: So Ryan, given all those many possibilities, what are the implications for the Federal Reserve and monetary policy after the election?
Speaker: Well, I think this is also an extremely interesting question.
Speaker: And when we talk about either monetary policy or fiscal policy, the first thing is that the context matters, right?
Speaker: What are the monetary or the fiscal policymakers trying to lean against in terms of how the economy is developing?
Speaker: I mean, in 2024, we know that the Fed is still going to be focused on its battle with inflation and still trying to bring inflation down to its 2 percent target.
Speaker: But the question is, how does the economy evolve over the course of not just this year but in 2025?
Speaker: In circumstances where the economy is showing clear signs of losing momentum, that opens the door potentially to both monetary and fiscal policy responses.
Speaker: We know in 2025 one fiscal policy issue is that there are a series of expiring tax cuts, really, for both individuals and businesses that will expire or sunset towards the end of that year, 2025.
Speaker: So that can be a year where we can expect more debate about fiscal trajectory, government revenues, and of course this raises additional questions about the sustainability of government debt in the United States.
Speaker: And Dara, can we say anything about the implications for the US dollar?
Speaker: We can say lots, as I will.
Speaker: Look, what I think is wonderful about this, of course, is...
Speaker: Marx will devote all this energy for the next seven, eight, nine months trying to guess what the outcome of the election is.
Speaker: But even if you told them this is the outcome, they would spend the next age debating about, well, what does that outcome actually mean?
Speaker: And the simple reason for that is there's so many moving parts.
Speaker: I mean, you mentioned fiscal policy.
Speaker: Even allowing we knew what fiscal policy was going to be.
Speaker: would the market react by, let's say, for example, a fiscal stimulus?
Speaker: Would that be dollar positive because it boosts economic activity?
Speaker: To Ryan's point, would that be dollar negative because it raises questions about fiscal sustainability and the overall health of government finances?
Speaker: So there's one example.
Speaker: And I think also, you know, the read across to monetary policy, you know,
Speaker: We've seen in the past, for example, President Trump in his first term was quite critical of the Fed and its failure to reduce interest rates.
Speaker: And that was impactful on market.
Speaker: You know, his tweets at the time had a market impact.
Speaker: In fact, one study shows that they had more of an impact than 90 percent of the economic data coming out of the U.S.
Speaker: So something we have to be mindful of again.
Speaker: So, yeah, there's a lot happening.
Speaker: Chair Powell, his term will end in 2026.
Speaker: So that will be another pinch point, I guess, that Marcus will ponder.
Speaker: But wonderful.
Speaker: Yeah, lots of moving parts, lots of moving parts, which should imply a little bit more volatility, a little bit more uncertainty.
Speaker: Ultimately, on balance, we would think favor the dollar.
Speaker: But it's not a simple linear relationship between a given election outcome and a dollar implication.
Speaker: So one certainty is that we can expect heightened uncertainty in the coming months.
Speaker: Thank you both so much for talking us through this.
Speaker: Great.
Speaker: Thank you.
Speaker: Thank you, Elaine.
Speaker: Now here's a look at some of the other key news from global research this week.
Speaker: As we begin the year of the dragon, we've published a multi-asset report outlining our views on China.
Speaker: Among the key takeaways, our team expects China's economy to grow at 4.9% this year, despite the property sector continuing to cause a drag.
Speaker: On the currency front, we expect the renminbi to remain roughly stable against the US dollar with the help of policy support.
Speaker: The report also looks at how China plays into our nine key investment themes, from the rise of electric vehicles to humanoid robots to falling birth rates.
Speaker: Elsewhere, Nicole Inouye, head of America's Equity Strategy, has been assessing the dominance of big US tech companies.
Speaker: The so-called Magnificent Seven, which includes Apple, Amazon, and Meta, contributed to two-thirds of the S&P 500 price performance over the past year.
Speaker: So should we prepare for a tech bubble similar to that of 2000?
Speaker: Nicole doesn't think so and outlines in her new report
Speaker: why she sees few parallels to the tech boom of the late 1990s.
Speaker: Now, we talked about trade earlier, and that's actually also the topic of our next Live Insights event.
Speaker: On the 27th of February, you'll have the chance to ask your questions to our trade economist, Shanela Rajanagam.
Speaker: For details on how to register or more information about anything we've talked about on the podcast, please email askresearch at hsbc.com.
Speaker: So that's it for this week.
Speaker: From all of us here at HSBC Global Research, thanks very much for listening.
Speaker: Please join us again next week for another edition of the Macro Brief.
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.
