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The Macro Viewpoint - Rates up, dollar down
39 Plays2 years ago
Ryan Wang and Simon Wells review the latest rate hikes by the Fed and Bank of England following market turbulence. Paul Mackel explains why we think the dollar is likely to weaken over the coming months.
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Transcript
Introduction and Podcast Context
00:00:01
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
Make sure you're subscribed to stay up to date with new episodes.
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Speaker
Thanks for listening, and now onto today's show.
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The following podcast was recorded for publication by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Financial Market Turbulence Post-Central Bank Meetings
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Hello, I'm Aline Van Dyne in New York.
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And I'm P.S.
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Butler in London.
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Coming up on today's programme, after another turbulent week in financial markets, we'll be looking at the implications for central bank policy following the latest Fed and Bank of England meetings.
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And we look at what recent events mean for the currency markets and the key drivers of the dollar going forward.
Credit Suisse's Takeover by UBS
00:01:03
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Now, it's been a dramatic week for financial markets with concerns about banking stability dominating, culminating in the takeover of Credit Suisse by UBS.
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The market gyrations created further complications for central banks as they tried to ease inflation.
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We're going to look at two major central bank meetings this week, beginning here in the US with the Federal Reserve.
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I'm joined by Ryan Wang, US economist.
00:01:28
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So Ryan, after quite sharp swings in expectations in the last few weeks, the Fed ended up delivering a 25 basis point hike.
Federal Reserve's Rate Hike and Banking Sector Impact
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What's the bigger picture here?
00:01:41
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The Fed delivered a 25 base point right hike.
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So what it really came down to was what sort of forward guidance would the policymakers delivered?
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And in the event, the policymakers chose to keep their projection, at least a median projection for the federal funds rate at the end of this year unchanged at five and one eighth percent.
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Well, that would only imply one more 25 base point rate hike.
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And the reason for this is an idea that recent developments, primarily in the banking sector, are going to lead to tighter credit conditions that will impact households and businesses, slow down the economy, and in some sense, act as the equivalent of additional rate hikes.
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And so for this reason, the Fed chose to keep its forward-looking projections unchanged.
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So does this mean this might be the last hike, or is there still more ahead?
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Well, it's going to come down to this tension between the incoming economic data and the potential for recent developments to weigh on the future outlook.
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Actually, Fed Chair Jerome Powell discussed how the data over the last six weeks on inflation and labor market activity have come in stronger than expected.
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So it really will depend on this combination and this tension.
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We are still forecasting two more 25 base point rate hikes at the May and June policy meetings.
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The Fed is still very much focused on bringing inflation lower.
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We think this will take time and that any reduction in core inflation pressures is only likely to be gradual.
00:03:10
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And we're actually expecting that the Fed will leave that policy rate unchanged from the second half of this year all the way until the second quarter of 2024.
00:03:19
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And Ryan, any further insights from Chair Powell about the extent of the banking sector stress or just how concerning that is?
00:03:30
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Well, Fed Chair Jerome Powell, echoing comments from Treasury Secretary Janet Yellen, said that there were some signs that perhaps deposit flight at depository institutions had begun to fade a little bit.
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So that's positive news.
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But at the same time,
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The entire impact of this episode has already led to a tightening in broader financial conditions.
Chair Powell's Commentary on Financial Conditions
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And this is what the policymakers are concerned could weigh on economic activity going forward.
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And so this is going to be a space that we'll need to watch very closely over the next couple of months.
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Thanks, Ryan.
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Looking forward to further updates.
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Thanks, Aline.
00:04:11
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Let's get the view from this side of the pond now, where the market volatility also presented a headache for the Bank of England.
Bank of England's Rate Decision and Inflation Trends
00:04:18
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This time last week, the prospects of a rate hike looked to be in the balance.
00:04:22
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That was until the latest inflation data surprised on the upside on Wednesday.
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Simon Wells, Chief European Economist, can give us the details.
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Simon, welcome to the podcast.
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Hi.
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Simon, before we get to the Bank of England, two other central banks raised rates in Europe.
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Can you give us the details?
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So we had a 25 basis point increase from the Norgers Bank, taking its key policy rate to 3%.
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Norgers Bank was, of course, the first major central bank to start the tightening cycle, but it's unlikely to be the first to stop.
00:04:52
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It revised up its projected path for the policy rate quite substantially.
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It's now looking for about 50 basis points more over the coming months, with cuts starting in 2024.
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Then, of course, we had the Swiss National Bank.
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It hiked by 50 basis points.
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That's pretty much as economists have expected.
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The market was maybe pricing in a little less after recent events.
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It, too, was a bit hawkish.
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It left the door open to more.
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Very focused on the inflation outlook.
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It now sees prices increases as fairly broad based.
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And it thinks that swift action put a halt to the crisis there.
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We think it might be done.
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may rely more on FX intervention going forward, but certainly the door is open to more there.
00:05:38
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So let's come back to the Bank of England and that inflation print yesterday, headline inflation above 10%.
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Was that a bit of a shock?
00:05:46
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It was.
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It was a big number.
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Let's be clear.
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Headline inflation was expected to fall a bit.
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It rose from 10.1% to 10.4%.
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Perhaps even more crucial, there was a 0.5% upside surprise on core inflation, which rose to 6.2% and food inflation up again, really reaching pretty eye-watering levels in the UK now.
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So it was a big number.
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And as you said in the intro, ahead of that, I think it was a bit more in the balance.
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There were some glosses to the inflation number.
00:06:19
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Given that food and places that sell food like restaurants was a big part of it, the numbers were collected on Valentine's Day.
00:06:28
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So the romantics like you, Piers, who were taking people to expensive restaurant meals, that may have boosted things a lot.
00:06:35
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No doubt, though, it was a big number.
00:06:38
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But nevertheless, you expect inflation to fall substantially between now and the end of the year.
00:06:42
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Remind us as to why that is.
00:06:43
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Well, that's in headline terms, and that is down to the energy price falls we've seen in wholesale terms.
00:06:50
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And they will start to feed through the UK regulatory mechanism.
00:06:54
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And by July, we should start seeing energy bills come down.
00:06:58
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So what's your outlook for rates in the UK now?
00:07:01
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Well, the Bank of England hiked 25 basis points today, as was widely expected, taking the policy rate to 4.25%.
00:07:09
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The vote was 7-2, two of the NPC members voting for no change, but the tone was pretty neutral.
00:07:17
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They didn't really say anything particularly hawkish, anything particularly dovish.
00:07:21
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They maintained the same broad messages in February that evening,
00:07:25
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If there was more evidence of inflationary pressure, further tightening might be required.
00:07:31
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In our view, that's it.
00:07:34
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We will stay at 425 now for some time with risks in both directions.
00:07:39
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But the market is pricing about a 70% chance of another 25 basis point rate rise at the next meeting in May.
00:07:47
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Well, I very much hope that your inflation forecast won't get in the way of further romantic endeavour.
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But thank you for joining us today.
00:07:52
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Thank you, Piers.
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I'm Harold van der Linde.
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And I'm Fred Newman.
00:07:59
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And you can find us under the banyan tree.
00:08:01
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Join us weekly where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
00:08:11
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Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
00:08:21
Speaker
Enjoy the rest of your podcasts and we'll see you under the banyan tree.
Impact of Fed's Rate Hike on the U.S. Dollar
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So let's switch to the currency markets now and find out what these developments mean for the US dollar.
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Paul Mackel is Global Head of FX Research.
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He spoke to Graham McKay in Hong Kong earlier.
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Paul, welcome to the podcast.
00:08:39
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Thank you very much.
00:08:40
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So a 25 basis point rate hike from the Federal Reserve.
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How's that impacting your thoughts on the dollar?
00:08:47
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Well, the dollar has weakened pretty noticeably since that hike occurred.
00:08:51
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And in our view, we're still in the chop regime for the broader dollar.
00:08:56
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That is, there's still lots of uncertainties that have been ongoing since the start of this year.
00:09:01
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But ultimately, we think that the longer-term outlook hasn't changed.
00:09:05
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And we're going to be soon heading into the flop phase of the dollar.
00:09:08
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And that is one where it resumes its decline.
00:09:11
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And what's going to drive that?
00:09:13
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It's a combination of two things.
00:09:15
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First of all, less fear of the Fed, which seems to be kind of coming through in recent weeks.
00:09:21
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And the second thing is reduced volatility and hopefully some improvement in risk appetite.
00:09:29
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Those conditions, I think, would be quite important for this dollar weakness to become more potent.
00:09:35
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But while we are seeing quite a lot of volatility in markets, is there a safe haven flight to the dollar that's propping it up for the time being?
00:09:42
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Well, it's a good question.
00:09:44
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And really, there's been a tug of war of sorts, where on the one hand, where we've had lower treasury yields are telling us that the dollar should be weaker.
00:09:52
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On the other hand, we have had, clearly, pockets of significant market volatility and risk aversion, which supported the dollar.
00:10:00
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So there was a tug-of-war of sorts that was unfolding.
00:10:03
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It seems to be some of those forces are giving way in favor of lower yields and in pressuring the dollar.
00:10:10
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But as I said, the big picture view for us hasn't changed.
00:10:13
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We still think that the dollar will end up weakening a lot more than what people are expecting.
00:10:18
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Let's move over to the broader FX market.
00:10:21
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You've got a new currency outlook out with the title of Breakpoint.
00:10:24
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Just give us a little bit of a backstory behind that title and what it represents.
00:10:29
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It's a reference to, well, things are breaking because of central banks' very aggressive action with regards to the tightening of monetary policy.
00:10:38
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So yes, there's been a lot of market stress.
00:10:41
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lately but however we have to reference the thinking about what does this mean for our broader views we know the risks of course that if the u.s economy were to hit a hard landing there could be a temporary resurgence of the dollar because you have that risk aversion also previous periods have shown that sharp contractions in the u.s economy are associated with dollar strength but we would still push back against that being sustained dollar rise we don't think so it'd be temporary
00:11:09
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That's why we haven't changed any of our long-term views.
00:11:12
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This dollar is going to be in a trend decline over the coming quarters.
00:11:17
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And who benefits from that?
00:11:18
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Presumably, emerging markets currencies are in with a fighting chance if the dollar goes down?
00:11:23
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I think that given that there's still some lingering uncertainties out there, I think primarily it's going to be more the other reserve type currencies initially.
00:11:33
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So the Japanese yen, the euro is performing very well, even some of the smaller reserve currencies.
00:11:40
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But going forward, if it turns out that there's less fear of the Fed, global economy is showing some signs of bottoming, if not even improving, then there could be other cyclical currencies that can also benefit.
00:11:54
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And a lot of those sit in the emerging market space.
00:11:57
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All right, Paul, thank you very much indeed.
00:11:59
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Thank you very much.
00:12:02
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So that wraps things up for another week.
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Special thanks to our guests, Ryan Wang, Simon Wells, and Paul Mackle.
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From all of us here, thanks for listening.
00:12:12
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Please join us next week for another edition of the podcast.
00:12:34
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Thank you for joining us at HSBC Global Viewpoint.
00:12:37
Speaker
We hope you enjoyed the discussion.
00:12:39
Speaker
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