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: You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
Speaker: This podcast was recorded on Thursday, the 17th of November, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Coming up this week, the US dollar has recorded one of its biggest rallies in four decades.
Speaker: We find out why our FX team now sees the greenback reversing course.
Speaker: China has taken potentially game-changing steps to stabilize the nation's contracting housing market.
Speaker: We'll explore those actions.
Speaker: And after one set of fiscal pledges made Liz Truss the shortest serving prime minister in UK history, a new budget from a new government.
Speaker: We'll be looking at the implications of the new mix of big spending cuts and tax rises.
Speaker: Hello, I'm Piers Bartlett.
Speaker: And I'm Aline Van Dyne.
Speaker: We begin this week in the currency markets, where the US dollar has performed strongly over the past 18 months.
Speaker: However, having been firm believers in the greenback's rise, our FX team are now looking for a pullback next year.
Speaker: Paul Michael is Global Head of FX Research, and he joins us from Hong Kong.
Speaker: Paul, welcome to the podcast.
Speaker: Thank you very much.
Speaker: So Paul, you've called the dollar's peak.
Speaker: Before we get into the new view, can you remind us why you had liked the dollar for quite some time?
Speaker: Well, definitely, because we believe that the dollar's outperformance has very much rested on three drivers.
Speaker: The first is what's been happening with global growth.
Speaker: With global growth slowing pretty much sequentially from the middle of last year, that's an important tailwind to the U.S. dollar.
Speaker: And in fact, we can take this type of
Speaker: thinking or analysis back even into the 70s.
Speaker: I mean, typically the dollar does better when the global economy is struggling.
Speaker: The second thing has been resting on the outlook for the Federal Reserve.
Speaker: We've seen a massive amount of repricing in terms of interest rate expectations.
Speaker: And as those level of yields have been rising and those change or upward change in interest rate expectations have been adjusting, that's certainly been supporting the US dollar too.
Speaker: And the final feature comes down to, well, risk appetite or the lack thereof.
Speaker: Because when we've had these uncertainties, whether in the global economy or monetary policy from the Federal Reserve, that's been weighing on risk appetite.
Speaker: And in that context, again, typically the U.S. dollar does well.
Speaker: So all of those drivers, the combination of them, that is, have been supporting the dollar to some of its best performance since the early 1980s.
Speaker: Speaking of the Fed, I guess the outlook for U.S. interest rates is a key reason for your change of view?
Speaker: It's very much part of it.
Speaker: It's not only to do with the Federal Reserve and how it could stop raising interest rates in the early part of next year.
Speaker: There are other signposts.
Speaker: Importantly, we discussed how the global economy has been slowing, and the indications still point in that direction.
Speaker: But on the other hand, you look at the pace of this slowdown.
Speaker: It's been losing momentum.
Speaker: Recession probabilities have been rising globally.
Speaker: So in other words, we're factoring in more of the bad news than we were six, 12 months ago.
Speaker: So when we think about tailwinds to the dollar through that angle, it's not seen to be as powerful as we go into 2023.
Speaker: Yes, the Fed matters because that anxiety when they finish raising interest rates will come down.
Speaker: And then we think that'll be another important reason why the dollar's overvaluation could correct.
Speaker: And with that correction, would we be right to assume that there's now less dollar volatility on the horizon?
Speaker: Absolutely, but I think there's a sequencing of sorts.
Speaker: So it's a very much a good question that relates to the previous one.
Speaker: Because prior to the Fed's last rate hike, when we looked at the analysis in the past, the dollar tends to be more volatile.
Speaker: So in the run-up to the end of that tightening cycle.
Speaker: And then when the Fed finishes,
Speaker: that volatility tends to drift lower.
Speaker: And I think that says something about the anxiety levels.
Speaker: There's still this uncertainty.
Speaker: You get this choppiness of the dollar into the final stages of the rate hikes.
Speaker: And then thereafter, things begin to calm down.
Speaker: And that, I think, is important because if that volatility is lowering, that safe haven bid for the dollar or that volatility bid for the U.S. dollar
Speaker: begins to moderate.
Speaker: And we think that that leads to a correction in this overvaluation that's been developing for over the last year.
Speaker: And as dollar momentum slows, there must be some emerging market economies breathing a sigh of relief for their own currencies.
Speaker: The short answer is yes.
Speaker: I think there will be some emerging economies or emerging markets, central banks that will feel more comfortable with the dollars correcting, moving lower, that is.
Speaker: but also some other signs of relief too if the Federal Reserve is going to be finished raising interest rates in the early part of next year.
Speaker: So yes, it will be helpful to emerging market currencies.
Speaker: Generally speaking, we're looking for a softer dollar environment to take hold, but more likely beginning in the late first quarter as we roll into the second quarter of 2023.
Speaker: Prior to that, there's still lots of uncertainties out there.
Speaker: The dollar chop could still be quite elevated, but thereafter, we think it'll begin to flop.
Speaker: What are the risks to your dollar view?
Speaker: Well, the main risk to the view is that this plays out faster than expected.
Speaker: The dollar certainly was appreciating at a much stronger pace than we first were thinking close to 18 months ago.
Speaker: The risk, of course, the opposite also holds true, that it begins to deflate at a faster pace because the stars are aligning more.
Speaker: But again, our central view is that it's still going to be quite choppy, and then that flop will begin to materialize more confidently from the second quarter onwards.
Speaker: That's a great summary, Paul.
Speaker: Thanks for your time.
Speaker: Thank you very much.
Speaker: China's property market has struggled recently with issues ranging from debt-laden developers to stall projects.
Speaker: However, over the past week, Beijing has rolled out sweeping measures with a view to stabilizing the housing market.
Speaker: Jing Liu, chief economist for Greater China, has been assessing its potential impact.
Speaker: She spoke to Graham Mackay earlier.
Speaker: Ching, many thanks for joining us.
Speaker: Welcome to the podcast.
Speaker: Thank you for having me again.
Speaker: So before we get into the new measures themselves, just give us a bit of background on the Chinese property sector and why we've been keeping such a close eye out for an announcement for so many weeks now.
Speaker: Right.
Speaker: So the housing correction actually started in the later half of 2021.
Speaker: And we have already seen the past four quarters, the housing sector was contracting, both in terms of the commodity home sales and then the property investment, even the land sales or in the downhill.
Speaker: And people started to worry whether this will provide further drag to Chinese economic growth next year.
Speaker: And furthermore, some people start to wonder whether this will evolve into a bigger kind of mortgage crisis.
Speaker: So that's why everyone is eyeing on what Beijing can do.
Speaker: In particular, we have seen actually quite some measures here and there, but it's more in a piecemeal type of manner.
Speaker: All right, well, now that the big announcement has arrived, which you have referred to as a game changer, just tell us exactly what they are doing that's so significant and also how it's different to the sort of easing efforts that we've seen in the past.
Speaker: It is a game changer, I think, mostly because now the focus has shifted towards supporting the property developers.
Speaker: So previously, we have seen lots of measures trying to boost the demand and also trying to make sure the start project can be finished and delivered.
Speaker: But those are not enough in terms of supporting or reviving the market confidence.
Speaker: So we end up with a problem of chasing a growing shadow in a sense that we start to see the distressed developers, the incompleted projects probably need something like 3 trillion RMB to finish up and deliver.
Speaker: And the hole or the funding gap is keep growing.
Speaker: Fortunately, we see the decisive measures from Beijing since last week, and the key is to save the property developers.
Speaker: If I may use a metaphor, if you want to save a plant, would you just water the leaves or would you make sure the water can go into the roots?
Speaker: I would say the latter.
Speaker: This is exactly what's going on now.
Speaker: They are trying to make sure
Speaker: the property developers can get funding from the credit supply, either from the bank loan or shadow loan, or they can do the bond financing or even equity financing.
Speaker: So with all these measures, we believe that's enough to crowd in the private market participation and work to stabilize the housing market.
Speaker: Okay, so that's the key.
Speaker: I mean, literally, to use your analogy, getting to the root of the problem by supporting the distressed developers.
Speaker: On top of that, what are the other measures that we're seeing?
Speaker: The other measures, including trying to keep supporting the housing market demand, for example, cut the mortgage rate, lower the down payment ratio, as well as to make sure those unfinished projects can eventually be finished.
Speaker: So you touched on sentiment earlier on.
Speaker: Now, obviously, we essentially over the last year or so saw sentiment around the Chinese property sector go from, I would venture to say, an all-time high to practically an all-time low.
Speaker: Would that be fair to say?
Speaker: And also, are these the measures that are going to hopefully take the sector back to that sort of spirited confidence that we saw up to about a year ago?
Speaker: I think that's fair to say we're coming from a historical high to a low.
Speaker: I think the measures, now that it has been very clear they're going to support the property developers, I would say if these 16 measures, for example, are not enough, they can have more.
Speaker: Will it take the sector back to where it was?
Speaker: I think, you know, the housing is for living kind of principle is still there.
Speaker: So they want to make sure the market can be stabilized.
Speaker: So in that regard, we don't think there's going to be a V-shaped rebound, but more realistically, it's going to be housing market stabilization and gradual recovery.
Speaker: And I mean, obviously, this has knock on effects, significant knock on effects for overall economic growth and performance and GDP in China.
Speaker: How long is it going to take to roll out these measures?
Speaker: And therefore, how long is it going to take for them to have a material impact on the wider economy?
Speaker: Yes, we have seen the measures already being implemented.
Speaker: You've seen the bond financing from some property developers.
Speaker: And this week, we have heard several developers thinking about the equity financing as well.
Speaker: How long will it take to revive the whole economy?
Speaker: I think that will...
Speaker: play out together with the gradual relaxation of the COVID measures.
Speaker: So we're confident in 2023, the economy can grow north of 5%.
Speaker: Well, that sounds like an encouraging note to end on, Jing.
Speaker: Thank you very much, as always, for your insight.
Speaker: You're very welcome.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Newman.
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Speaker: In the UK, Chancellor Jeremy Hunt has just delivered his much-anticipated autumn statement, outlining plans for tax rises and spending cuts.
Speaker: This comes as inflation hit over 11%, its highest reading in over 40 years.
Speaker: Let's get the key takeaways from Liz Martins, our senior UK economist.
Speaker: Liz, let's start with what the Chancellor announced today.
Speaker: Well, what they've done is they've told us there is a big fiscal black hole that needs to be addressed.
Speaker: And that's driven by lower forecast growth in the near term and higher spending on debt interest, plus the bits that remain from the previous government's plan for growth.
Speaker: So basically a £20 billion tax cut.
Speaker: So the government has announced a range of policies to address this, but they all fall disproportionately, whether tax rises or spending cuts, towards the end of the forecast period.
Speaker: So they've backloaded the tightening.
Speaker: All the media had trailed the reports that there would be 54 billion pounds of savings, and sure enough, there are.
Speaker: But they really begin to drag on borrowing or to reduce borrowing only from 2025.
Speaker: And in the near term, actually, there were some giveaways in the form of additional energy support.
Speaker: So the government will maintain a freeze on energy prices at a higher level of £3,000 for the average household versus £2,500 now.
Speaker: But still, that is lower than what market pricing would imply.
Speaker: And there's also some additional energy support payments for people who are on means
Speaker: tested benefits, people who are disabled and people on pensions as well.
Speaker: So has this actually fixed the public finances and addressed the many issues raised after the so-called mini budget?
Speaker: So I think the combination of the replacement of the Chancellor and the Prime Minister, the reversal of the tax cuts, most of the tax cuts from the so-called mini budget,
Speaker: and the policies that have been announced today certainly seem to have won over the markets.
Speaker: You know, UK rates are up by no more than US rates and German rates, for example, versus, say, the start of September.
Speaker: So the markets seem relatively happy with the change of direction the government has announced.
Speaker: But, you know, I wouldn't say the public finances are kind of magically fixed.
Speaker: In fact, despite this tightening, even though it's backloaded into the end of the forecast period, the UK government is still going to be borrowing £300 billion more than what it thought it'd be borrowing back in the UK.
Speaker: So that's still a lot more debt for the UK public finances and something for perhaps the market to worry about should we see, for example, an episode of market volatility.
Speaker: Liz, what about implications for forecasts or for the policy rate outlook?
Speaker: Yeah, so we've changed our inflation forecasts and this is because we had assumed, as per previous government policy, that prices for household energy bills would rise in line with wholesale market gas prices.
Speaker: Instead, we now know that the rise will be limited.
Speaker: by this government intervention.
Speaker: So this makes the difference between inflation at 9.9% in April 2023 and inflation at 8.8%.
Speaker: So inflation comes down considerably more quickly than it would otherwise have done without this intervention.
Speaker: But we don't think that's going to be big news for the Bank of England because it had assumed something very similar in its forecasts in the November monetary policy report.
Speaker: Broadly, I mean, there's a little bit of demand supportive news in the budget in the near term, those support payments for people in the face of the energy crisis, but it's relatively small.
Speaker: So there's nothing really in this budget to make us either feel more dovish about the BOE's prospects or more hawkish.
Speaker: Thanks so much, Liz.
Speaker: Thank you.
Speaker: So that's it for another edition of the podcast.
Speaker: Thanks to our guests, Paul Mackle, Jing Liu and Liz Martins.
Speaker: And from all of us here, thanks 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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