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, our weekly review of the key reports from our team of economists and strategists across the globe.
Speaker: Coming up this week, the Federal Reserve will be holding a September policy meeting next week.
Speaker: We find out why the outcome could be crucial for global bond yields.
Speaker: We consider what's next for global commodities following a huge run-up in prices.
Speaker: And we look at what's driving inflation on both sides of the Atlantic.
Speaker: This podcast was recorded on Thursday, the 16th of September, 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm Chris Brown-Hulmes.
Speaker: And I'm P.S.
Speaker: Butler.
Speaker: All eyes will be on the Federal Reserve next week as they hold their September meeting.
Speaker: And with new guidance due on the path of policy rates, there could be big implications for the bond markets.
Speaker: Let's get the details from Stephen Major, Global Head of Fixed Income Research.
Speaker: Steve, you've noted that 10-year U.S. Treasury yields are smack bang in the middle of their range for the year.
Speaker: What does that tell you about the way investors are viewing the market?
Speaker: I thought it was quite worth reflecting on the fact that we have probably seen the high for the year.
Speaker: Back in March, we had 1.74% and people were calling for 2% and above.
Speaker: So we have moved on a fair bit.
Speaker: And I think that maybe gradually people are accepting the idea that yields can't go up very much.
Speaker: For us, it's a validation of the lower for longer view and that when and if rates ever do go up, they won't go up very far.
Speaker: There's obviously a lot of focus in the market about when the Fed tapers.
Speaker: For you, that's much less important than the Fed's future path of policy rates.
Speaker: Why are you emphasizing that so much?
Speaker: Well, we've done a lot of work on that over the years, Chris, and there's no causal link between asset purchases and asset prices.
Speaker: The point of it is that treasuries and in fact government bonds generally around the world are mainly priced off of the path of the policy rate, the short rate.
Speaker: Now there may be some coincidence around tapering and other things that are going on but I really don't think there's a robust link.
Speaker: So for us what would really matter is any indication on the 2024 path of rates via the dot plot.
Speaker: And we are expecting to hear something about the Fed's projection for future rates, the so-called dot plot, as you've just mentioned, at next week's meeting, aren't we?
Speaker: Yeah, I don't think we want to be in the business of forecasting what other people are forecasting, because that's ultimately what it is, right?
Speaker: It's a median of 17 other forecasts.
Speaker: But the point is, we did have a hawkish surprise back in June when the 2023 median dot went up 50 basis points.
Speaker: the outcome was lower yields and a flatter curve.
Speaker: Now that doesn't have to be repeated, but to me that is something to look out for.
Speaker: I think somehow this 2024 dot is going to be between the 2023 and longer run, and if there's going to be an outcome it should be fairly benign for rates and if anything flatten the curve.
Speaker: But it's fair to say that you're not expecting a repeat of the taper tantrum that we saw back in 2013.
Speaker: Well, that's the point, Chris.
Speaker: You can see looking at the way the markets behaved, valuations and communications are completely different.
Speaker: So the Fed has been very good with communication.
Speaker: They've been very clear.
Speaker: And the valuations in terms of bonds are not as stretched.
Speaker: The yields aren't so far away from the longer run equilibrium.
Speaker: Also, look at real yields.
Speaker: They've been very well behaved.
Speaker: compared to 2013.
Speaker: So all of the evidence is there to say we haven't had a taper tantrum and we're not going to have one.
Speaker: Steve, that's a great summary.
Speaker: Thanks very much.
Speaker: Thank you, Chris.
Speaker: Global commodity prices have been on a tear since the onset of the COVID-19 pandemic.
Speaker: So could the upswing become a super cycle?
Speaker: Let's get the thoughts of Paul Bloxham, our chief economist for Australia, New Zealand and global commodities.
Speaker: He joins us from Sydney.
Speaker: Paul, welcome to the podcast.
Speaker: Great to be here.
Speaker: So, Paul, has that price momentum continued more recently?
Speaker: Well, we saw a very large rise in commodity prices just after the COVID shock, as you said.
Speaker: But we have seen actually signs that that is losing momentum in recent months.
Speaker: Certainly the earliest ramp up was much, much more rapid.
Speaker: And we've seen a range of commodity prices have started to level out.
Speaker: Things like oil prices are tracking at similar rates now to where they were a couple of months ago.
Speaker: Copper prices seem to be past their peak.
Speaker: Iron ore prices have come down a long way.
Speaker: And if you look at the agricultural space, although agricultural prices are quite high, they too have levelled out.
Speaker: Now, there are some that have risen, things like coal and gas, but if you sum together the overall global economy,
Speaker: commodity price index, it is losing momentum.
Speaker: And what has been driving that cooling in momentum?
Speaker: Well, it's a collection of factors, but a part of it is on the demand side and related to the slowdown we're seeing in global growth.
Speaker: This is partly related to the Delta outbreak, and that's having an impact.
Speaker: But it's also related to the fact that China has seen a slowdown in its infrastructure and
Speaker: and its property investment, these are two quite metals-intensive activities.
Speaker: We've also seen the Chinese authorities take quite direct measures to try to contain some metals markets.
Speaker: So all of that has sort of combined to slow down the upswing in metals.
Speaker: On the oil front, a lot of the story is that OPEC Plus has been delivering more supply back to the market, and that's been keeping the oil price from shooting a lot higher as that supply side adjusts.
Speaker: and on agricultural commodities.
Speaker: Chinese demand has softened a bit.
Speaker: The weather's looked a little bit better.
Speaker: This is combined to see those agricultural commodity prices broadly level out.
Speaker: Prices may be cooling, but they're up almost 100% from the lows of 2020.
Speaker: Do you still maintain this won't be a super cycle?
Speaker: Well, if we look at where commodity prices are, as you say, they've risen by about 100% since the trough in early 2020.
Speaker: But if we keep in mind and we compare that to the early 2000s,
Speaker: Back between 2002 and 2008, global commodity prices rose by 320%.
Speaker: So we're still on an order of magnitude smaller than that.
Speaker: And we wouldn't describe what's happened so far as a super cycle.
Speaker: And as the listeners may be aware, we've had a view for a while now that we don't think that this ramp up is going to turn out to be a super cycle anymore.
Speaker: A big part of that narrative for us is China is just at a very different stage of development now to what it was in the early 2000s.
Speaker: They don't need to build as much infrastructure or as much housing.
Speaker: Debt levels are a lot higher now than they were back then.
Speaker: And we still see China as the dominant source of demand for the range of commodities and particularly for the metals.
Speaker: So we don't subscribe to the view that we're likely to see a global commodity prices super cycle this time around.
Speaker: What do you see as the key risks to commodity prices right now?
Speaker: So most of the risks we see if we look forward are on the supply side rather than demand.
Speaker: We think demand is going to soften, global GDP is going to slow down a bit.
Speaker: But there are a range of supply side risks out there.
Speaker: One is the perennial risk of the weather, of course, and that has a direct impact on agricultural commodities.
Speaker: The weather has contributed in recent times.
Speaker: We had a La Nina phenomenon and there's a risk that we run into a second season of La Nina and that constrains supply.
Speaker: Things like the COVID-19 shock itself, the pandemic, has disrupted supply in very specific commodities, things like lumber and coffee.
Speaker: It's hard to predict those, but we may very well see more idiosyncratic shocks in individual commodities related to the pandemic.
Speaker: Geopolitics plays a role as well, and that's been playing a role in the aluminium market just recently.
Speaker: And then shipping costs are also up.
Speaker: The big one, though, that we really focus on in the report we published is rapidly changing climate change policy
Speaker: and what that means for the energy sector, but also what it means for the metals.
Speaker: And with the uncertainty that climate policy is bringing to energy markets and fossil fuels, what's your outlook for oil?
Speaker: Well, certainly the climate change policy story is very much an effect on the energy market and particularly fossil fuels as you describe.
Speaker: At the moment, actually, when you look at what we're seeing in coal and gas
Speaker: Those are two commodities where prices have really spiked recently.
Speaker: It just reminds us how dependent the world is still on these fossil fuels and how supply disruptions, which are causing those price rises, can have a pretty decent impact.
Speaker: On the oil front, Gordon Gray spends a fair bit of time talking about this in the report we published about the longer term story.
Speaker: I mean, there's a really neat chart in there that shows that, you know, if you look forward to 2050, if business as usual means that oil demand actually doesn't look too different to now, but if countries do commit and take action to get back to net zero, you know, the estimates show a 75% fall in oil demand by 2050.
Speaker: So those are two vastly different worlds.
Speaker: in terms of thinking about oil demand, the investment environment, and again, just an illustration of how uncertain things are over that longer-term horizon.
Speaker: Paul, thank you very much.
Speaker: Thank you.
Speaker: Figures published in the US and UK this week showed it's far too soon to relax about inflation.
Speaker: In fact, the UK saw its biggest monthly increase in prices since records began in 1997.
Speaker: Chris Hare, European economist, has been looking at the factors driving divergences in inflation prospects across the US, UK and Eurozone.
Speaker: He joins me now.
Speaker: Chris, let's start with those US and UK August inflation numbers.
Speaker: What did they tell us?
Speaker: Yes, some pretty interesting inflation numbers on both sides of the Atlantic.
Speaker: Now, the US numbers were broadly in line with expectations, but we're still seeing elevated rates of headline consumer price inflation up above the 5% mark in the US.
Speaker: So pretty high numbers there.
Speaker: If anything, though, the UK data were more interesting in August.
Speaker: We saw that really big increase in headline CPI from 2% to 3.2%.
Speaker: That's a huge increase.
Speaker: Now, a lot of that relates to base effects that we already knew about relating to things like VAT or a sort of echo effect from the eat out to help out restaurant discount scheme that took place last year.
Speaker: But actually, over and above those base effects, the headline inflation rate was materially stronger than we had expected.
Speaker: So that's one reason we thought it was worth revising up our UK inflation outlook.
Speaker: And not only that, you know, in Europe, we're seeing these really big increases in wholesale gas and electricity prices.
Speaker: And we thought that it was worth upgrading our UK outlook off the back of that as well.
Speaker: So we think that given all these effects, which we think are set to be transitory, you know, UK inflation could be well above the 2% mark through this year and indeed into next year, too.
Speaker: Now, I know you've been looking at inflation prospects across the US Eurozone and UK.
Speaker: What are the common factors there?
Speaker: So there's a lot of common factors that have pushed inflation rates up across all these economies over the past few months, when we're thinking about higher energy prices, for example.
Speaker: But there are some differences as well.
Speaker: So in the US where we're seeing the highest inflation rates, a lot of that is to do with used car price inflation, which really took off earlier on this year.
Speaker: But in terms of other things that we're seeing, probably we're seeing some impact of global supply chain disruption.
Speaker: In the US and the UK in particular, we think we're seeing what I call reopening effects where demand is coming back for newly reopened sectors and leading to some price pressures there.
Speaker: And a more fundamental issue that might be emerging is in labour markets.
Speaker: And again, this is in particular in the US and the UK, where it looks like we're seeing some pretty significant labour shortages.
Speaker: And that could be starting to have upward pressure on wage related inflation too.
Speaker: In general, inflation is a bit more subdued in the Eurozone.
Speaker: Is there a reason for that?
Speaker: Yes, I think the labor market really is at the crux of that, at least for the time being, it doesn't look like those labor shortages I mentioned in the UK and the US are as acute in the Eurozone.
Speaker: And actually looking forward, we think kind of fundamental inflation pressures from the labor market in the Eurozone are set to be softer.
Speaker: One thing that we observe on the European continent is that we see a lot of wage indexation practices.
Speaker: That means that wages tend, we think, to be less responsive to labour shortages.
Speaker: It's also worth pointing out that in the eurozone, inflation expectations are somewhat lower too.
Speaker: So when we're thinking about the outlook, we think that a lot of this near term inflation strength is set to be transitory.
Speaker: In the US and the UK, inflation should eventually settle towards the 2% mark.
Speaker: But because of that,
Speaker: difference in Eurozone labour markets, we actually see headline inflation in the Eurozone settling back towards more like one and a half percent.
Speaker: And final question then, Chris, what is what does this all mean for monetary policy from central banks?
Speaker: Well, in terms of central banks, we see a story of divergence.
Speaker: Now, in the UK, for example, we see two rate rises taking place next year, bringing bank rate up to half a percent by the end of next year.
Speaker: In the US, we expect interest rate increases to start in 2023.
Speaker: But the Eurozone story is very different.
Speaker: We're seeing in our forecast continued net asset purchases under its QE programs.
Speaker: And we see interest rates staying very much at their floor for the foreseeable future.
Speaker: And really at the core of that is that fundamental difference in the underlying inflation outlook.
Speaker: Chris, thanks so much for explaining all that to us.
Speaker: Thank you.
Speaker: So that's it for today's programme.
Speaker: Thank you to our guests, Steve Major, Paul Bloxham and Chris Hare.
Speaker: From all of us on the team, thanks for listening.
Speaker: Please join us again next week for another edition of the Macro Viewpoint.
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.
