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: Hello and welcome to the macro viewpoint from HSBC Global Research, our weekly podcast featuring the views of leading HSBC analysts on the outlook for the global economy and markets.
Speaker: I'm Piers Butler and I'm joined by Mary Watkins.
Speaker: Hi Piers, coming up on this week's podcast, the dollar has performed well this year, so is it on the path to a sustained recovery?
Speaker: we get the thoughts of Paul Mackle, Global Head of FX Research.
Speaker: With investors shifting their attention more towards inflation and growth, we look at the implications for emerging markets with Murat Olgan, Global Head of Emerging Market Research.
Speaker: And James Pomeroy, Global Economist, joins us to explain what the latest economic data can tell us about the state of the recovery.
Speaker: This podcast was recorded on Thursday, the 15th of April, 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Over the past few months, the dollar has been powering ahead, leading many investors to ask whether this is going to continue.
Speaker: So what does Paul Mackle, our global head of FX research think?
Speaker: He joins us now.
Speaker: So, Paul, do you think the dollar will continue to push higher?
Speaker: The short answer is no.
Speaker: I mean, our baseline scenario since late last year hasn't really changed.
Speaker: We still expect some modest depreciation of the dollar versus most currencies.
Speaker: Now, to be very clear in our thinking, we're not extremely negative on the dollar simply because a lot of dollar weakness in our eyes had played out in 2020.
Speaker: But as the global economy increasingly picks up momentum this year, we think that that will still put some additional downward pressure on the dollar.
Speaker: So essentially, other currencies playing catch up.
Speaker: Which one specifically?
Speaker: Well, that's a good question.
Speaker: I think front and centre right now comes down to the euro.
Speaker: It's been finding some support and recovery lately.
Speaker: And I think expectations are rising that perhaps the eurozone may be on the course for a more sustained recovery.
Speaker: We can see that in terms of how the data has been surprising to the upside.
Speaker: And indeed, that plays to our thinking that the euro can make some modest recovery still versus the dollar this year.
Speaker: Sterling has been performing very well.
Speaker: What's been driving that?
Speaker: And do you think that outperformance can continue throughout the year?
Speaker: I believe sterling has had the upper hand versus most currencies because, again, the expectations have been associated with this rapid deployment of the vaccine, helping to support expectations of a robust cyclical upswing of the UK economy.
Speaker: And we can see the repricing of interest rate expectations for the UK as well.
Speaker: So, Sterling has capitalized on that, but again, we're thinking about the catch-up stories.
Speaker: And the catch-up stories probably mean that Sterling's advantage will slowly begin to fade.
Speaker: And that's very much our view that it's not just beset by the global recovery looking increasingly better elsewhere.
Speaker: There's also some long-standing structural issues that could weigh on the currency, in particular, the current account deficit.
Speaker: Let's talk about emerging markets.
Speaker: There have been some tests recently.
Speaker: What has that left you thinking?
Speaker: Indeed, that has been the case.
Speaker: I mean, a number of EM currencies have been trading with greater volatility, but also weakening lately.
Speaker: And I think that there's this developed market impact to the recovery story in those economies that has been leading the charge and is making the outlook for EM looking challenged.
Speaker: And that's spilling over, as I said, to the currencies for now.
Speaker: Nonetheless, if our baseline view is correct and the dollar does face some modest depreciation this year, eventually some stability should come back in terms of the outlook for most emerging market currencies and helping them to stage a modest recovery.
Speaker: Paul, thanks very much.
Speaker: Thank you very much.
Speaker: 2021 began with great expectations for emerging markets, but with the first quarter bringing mostly disappointment, what's next for emerging market assets?
Speaker: Murat Olgun is our Global Head of Emerging Markets Research.
Speaker: Murat, welcome to the podcast.
Speaker: Thank you very much.
Speaker: So firstly, can you bring us up to date on the performance of emerging markets so far this year?
Speaker: Sure.
Speaker: Well, 2021 started with great expectations, a synchronized upturn in global economic activity with ample liquidity in the background.
Speaker: They were supposed to lift emerging markets.
Speaker: with some parallels to the past seen in 2017.
Speaker: But the first quarter brought most disappointment, unfortunately.
Speaker: EM equities have done better, which was in line with our original expectations at the turn of the year.
Speaker: And EM equity funds actually received record inflows, but they've still underperformed EM equities and fixed income has seen a big shakeup.
Speaker: When you think about that performance, what were the key drivers behind what took place?
Speaker: Yes, we think this is happening because the emphasis in global inflation debate has shifted more towards inflation than growth.
Speaker: The US is undergoing a very bold policy experiment.
Speaker: The call rates are higher and more volatile.
Speaker: And EM is also disappointing on its performance when it comes to containing the virus or vaccine rollout.
Speaker: And these have all led to shifts in perceptions that perhaps EM will see a deteriorating growth inflation mix.
Speaker: Maybe it will have more challenges to balance its recovery prospects and price pressures.
Speaker: So that was Q1.
Speaker: What's your outlook for the rest of 2021?
Speaker: Yes, I mean, on our side, we have long believed that a growing world economy, as opposed to a recessionary slump, should actually be something good for EM, even though EM might start as a growth underperformer.
Speaker: Our model suggests the health of global economic activity explains nearly half of the valuations, variations, I'm sorry, in EM returns.
Speaker: And our economics team is actually looking for U.S. and global inflation to remain broadly benign and under control towards the end of this year and into next year.
Speaker: A fixed income strategy is looking for U.S. treasuries to come down lava.
Speaker: U.S. dollar is still a million dollar question.
Speaker: As you heard from Paul, we are looking for some depreciation of the U.S. dollar.
Speaker: And also in the past, when the U.S. economy was growing with a widening current account deficit, this has actually been beneficial for emerging markets.
Speaker: So we still find opportunities across the year.
Speaker: Murat, thanks for talking to us.
Speaker: Thank you very much.
Speaker: We finished this week's podcast with an assessment of the recovery with James Pomeroy, global economist.
Speaker: He joins us now.
Speaker: So, James, you've been looking at the latest global economic data.
Speaker: And as the title of your report says, everything's up.
Speaker: Yes, it is.
Speaker: Pretty much every single chart we put in our chart book this month has got a line going up in one way or another.
Speaker: Some of those are pointing to some good news.
Speaker: And unfortunately, some of those lines going up are pointing to things being bad news, though.
Speaker: Let's start with COVID-19.
Speaker: What's the latest there?
Speaker: So that's one of those where the lines going up are bad news in terms of global case numbers.
Speaker: They've clearly picked up in the past couple of weeks, led by an increase in the number of cases in Europe, in Latin America and in India.
Speaker: But on the flip side, we have still got an improvement in terms of the number of vaccinations.
Speaker: And now, even in parts of the world where the vaccination rollout had either been very slow or very slow to get started.
Speaker: But we are seeing a bit of progress there.
Speaker: So there's some better news on the COVID front in terms of vaccines, but those case numbers are still looking a little bit worrisome.
Speaker: And turning to the economic side, things are looking strong in the US.
Speaker: They really are.
Speaker: A lot of the data we've had in the past few weeks have been unbelievably strong.
Speaker: Either the survey data, such as consumer confidence or the PMI numbers,
Speaker: all at multi-year highs and really looking like the US consumer has got a fair bit of momentum behind them.
Speaker: And that's being reflected in some of the spending data too.
Speaker: It's also worth noting some of the high frequency data, some of the mobility data, some of the numbers of people getting on planes, all of those sorts of indicators are all picking up quite strongly too.
Speaker: So the US outlook has clearly started to look quite a lot better in the past few weeks.
Speaker: And what's happening elsewhere?
Speaker: So things are looking slightly better and what's actually quite encouraging is even in those parts of the world where we've had restrictions, we've seen some improvements in the activity numbers, be it in terms of the monthly GDP prints or in terms of some of the survey data.
Speaker: The global manufacturing PMI really, really strong in March.
Speaker: The services PMI up at a multi-year high too.
Speaker: So things are looking pretty good even in those parts of the world where there are clearly some big risks
Speaker: around the number of COVID cases and the number of restrictions, the economic data is holding up a little better than we might have expected.
Speaker: What about inflation?
Speaker: So some of the inflationary pressures are still building.
Speaker: That stronger economic momentum is putting some upward pressure on prices.
Speaker: But we are seeing this coming through a number of ways.
Speaker: So some of this is higher commodity prices, it's oil prices, it's food prices, it's shipping costs.
Speaker: And that's been really clearly reflected in the PMI, so the input price components in the manufacturing sector
Speaker: and services sectors really quite strong.
Speaker: So there's clearly a lot of inflationary pressure, but we're not yet seeing that in those headline CPI prints.
Speaker: In much of the world, those numbers are still well below central bank targets.
Speaker: They're going to pick up in the next few months as these base effects really start to come through, but at least on the numbers we've had so far, and we still have a relatively low set of CPI inflation prints, particularly on the core measures in much of the world.
Speaker: And finally, James, what does this all mean for policy?
Speaker: Well, it's a really challenging environment for policymakers, both on the monetary policy side and the fiscal policy side.
Speaker: So on the monetary policy side, you've got this pick up on inflation, you've got this pick up in demand, you've got to pick up in house prices.
Speaker: But equally, central bankers across the world are wanting to keep interest rates low and help to support this recovery.
Speaker: So we're still not expecting any rate rises in any of the major economies in the course of the next year or so.
Speaker: And for fiscal policy, it's a real challenge because this pickup in COVID cases, more restrictions may mean we have to see a little bit more on that front too.
Speaker: But at the same time, we've already had an enormous amount of fiscal stimulus in the US.
Speaker: And now there's some debate about whether the US is likely to overheat because of this recovery being so strong.
Speaker: So policy is likely to stay supportive across the world, even though we are seeing this pickup in a lot of the economic activity data.
Speaker: James, thanks very much for your time.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thanks to Paul Mackle, Murad Organ and James Pomeroy.
Speaker: From all of us here on the team, thanks very much for listening.
Speaker: We'll be back again next week.
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.
