Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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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 Chris Brown-Humes.
Speaker: Hi Piers, coming up on this week's programme, we look at how the pandemic is evolving.
Speaker: First, we'll take a look at how cases are rising rapidly in some European economies with Simon Wells, Chief European Economist.
Speaker: Then we'll head down under to hear from Paul Bloxham, chief economist for Australia, New Zealand and global commodities, about why an outbreak of the virus in Sydney has led him to downgrade his growth forecast for Australia.
Speaker: And we hear from Steve Major, global head of fixed income research, on why US bond yields have fallen back to the middle of their range for the year.
Speaker: This podcast was recorded on Thursday, the 15th of July, 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We begin this week in Europe, where it's a mixed picture on the COVID-19 front.
Speaker: Cases remain low across much of the continent, but there have been sharp spikes in the UK and Spain, despite impressive vaccine rollouts.
Speaker: For more on this and the UK's stronger than expected inflation data, we're joined by Simon Wells, Chief European Economist.
Speaker: So Simon, according to your latest COVID tracker, this Delta variant seems to be on the rise in Europe.
Speaker: What's the outlook there?
Speaker: Well, that's right, Piers.
Speaker: Cases in Europe are very much back on the rise now across most countries, albeit from a very low base in some of them.
Speaker: But incidents of the Delta variant are spreading quite rapidly now.
Speaker: And Spain and the Netherlands have joined Portugal and the UK in seeing really quite rapid rises in cases.
Speaker: Now, so far in terms of the economy, we've not seen any material rowing back in the easing of restrictions.
Speaker: That's a minor reversal in the Netherlands.
Speaker: But it is a growing downside risk and a worry for the future.
Speaker: not least because in the UK, vaccination rates of the elderly in particular are much higher than they are in other parts of Europe and the Eurozone.
Speaker: So for France and Italy, for example, about 60% of 50 to 70 year olds are double vaxxed.
Speaker: Whereas in the UK, you know, that's way north of 80%.
Speaker: So it is a different situation.
Speaker: And it is a concern and growing downside risk for the economic outlook in the eurozone and also, of course, in the UK.
Speaker: Having said that, Simon, the data in the UK recently has actually been quite strong, particularly on the inflation front.
Speaker: Can you comment on that?
Speaker: Yes, that's right.
Speaker: There were several key indicators out of the UK this week, and it won't have done anything to allay fears of anyone worried about inflation.
Speaker: It surprised strongly again to the upside on Wednesday with CPI headline inflation rising to two and a half percent, much stronger than expected.
Speaker: And most of the upside news was in core inflation.
Speaker: Indeed, looking at the monthly rise in core inflation in the UK, it was the strongest for any month of June 2020.
Speaker: since CPI began in 1997.
Speaker: So the UK experience is looking a lot more like what we've seen in the US recently, even if not quite as pronounced.
Speaker: And some of the inflationary pressures we're seeing may prove to be a little more durable.
Speaker: Now on the back of these data on Thursday, we had the labour market.
Speaker: Unemployment rate was steady at 4.8%, but it was pay growth that really grabbed the attention.
Speaker: Total pay rose to 7.3% on the headline three month on year measure.
Speaker: That was up from 5.6% in April.
Speaker: And it means that in real terms, pay is growing at 5.6% as well.
Speaker: Now these are big numbers.
Speaker: Some of it's a composition effect resulting from labour market changes that follow from the pandemic.
Speaker: But even in an underlying sense, these are pretty strong pay numbers.
Speaker: It might not chime with everyone in the UK, but pay is growing strongly in aggregate.
Speaker: Hiring indicators are good.
Speaker: And there are definitely some pockets of tightness in the UK labour market.
Speaker: And in terms of policy implications, you're saying that the Bank of England should nevertheless be patient.
Speaker: What do you mean by that?
Speaker: Well, I think, first of all, I should say we have revised up our near term inflation forecast as a result of this news.
Speaker: And over the coming months, our inflation forecast is averaging half a percentage point higher than we previously expected.
Speaker: So inflation in the UK could reach 3% in August, we think.
Speaker: And this hasn't escaped the MPC's notice.
Speaker: We've had several comments this week from MPC members.
Speaker: Dave Ramson on Wednesday saying that tightening could come sooner than previously thought.
Speaker: These sentiments were echoed by Michael Saunders on Thursday when he said it might be appropriate to withdraw some policy stimulus fairly soon.
Speaker: So clearly some members of the MPC are getting a bit hawkish.
Speaker: That said, it is our view that they're going to want to wait and see in the data that the job support measures have been rolled off in a fairly orderly fashion.
Speaker: They may want to wait and see what happens with some of these COVID downside risks.
Speaker: And so the governor has said that a lot of this may be temporary and the bank can afford to be patient.
Speaker: That said, I think when we get into next year, they see all these data.
Speaker: Some modest tightening probably is warranted.
Speaker: And a reminder of our view is that the Bank of England will raise rates by 15 basis points next May.
Speaker: Follow that up with a 25 basis point rise next November and then at least one rate rise in 2023.
Speaker: Although, of course, there are risks to this view in both directions.
Speaker: Very clear, Simon.
Speaker: Thank you very much.
Speaker: Thank you.
Speaker: The UK is opening up on July the 19th, despite rising cases.
Speaker: On the other side of the world, it's a different story.
Speaker: In Australia, an outbreak of the Delta variant has put Greater Sydney back into lockdown.
Speaker: This has led Paul Bloxham, our chief economist for Australia, to cut his growth forecasts.
Speaker: He joins us from Sydney.
Speaker: So, Paul, Australia and New Zealand have been pretty successful in containing this virus until now.
Speaker: So how much of a blow is this outbreak in Sydney?
Speaker: Oh, it's certainly a significant risk.
Speaker: As you say, Australia and New Zealand actually have had this great benefit of being distant islands.
Speaker: And the strategy they've run so far has been shut the borders, keep the virus out.
Speaker: If it gets in in any places, quick, sharp lockdowns or using the testing, tracing and quarantining to contain it.
Speaker: And they've managed to keep it essentially out of the community.
Speaker: I mean, New Zealand still has.
Speaker: But Australia, well, we've got this outbreak now in Sydney in particular, the Delta outbreak.
Speaker: And we think there's a risk here that this is actually a turning point for the whole national strategy because in large part because Delta moves so much faster that it's quite hard for the testing, tracing and quarantining to keep up.
Speaker: And if that's the case, we will become much more reliant, of course, on the vaccinations being the way that we deal with managing the virus.
Speaker: And unfortunately, Australia is still lagging there.
Speaker: I mean, the vaccination rate nationally for double jabs is only 10%.
Speaker: It's catching up, but it's still quite low.
Speaker: So that means we're in a lockdown in Sydney right now.
Speaker: In fact, they've just announced a lockdown, a short lockdown in Victoria as well.
Speaker: And they're trying to contain it that way.
Speaker: And that's going to weigh on economic activity in the second half of this year.
Speaker: So let me just pick you up on that last point.
Speaker: How do you expect the economy to be affected by this?
Speaker: Well, we've seen a really strong bounce back in GDP.
Speaker: The second half of last year and the first quarter of this year, we got all the way back above the pre-pandemic level by Q1 and for employment as well.
Speaker: However, obviously, we think growth is going to slow from here.
Speaker: We've had that in mind for a while anyway, because the border is closed and that's stalling population growth.
Speaker: The other factor we have had in mind is that the fiscal impulse is going to fade.
Speaker: And that will weigh on growth.
Speaker: But now, of course, we've also got the Greater Sydney lockdown.
Speaker: And we think that that's going to see that GDP does actually contract in the third quarter of this year and installs overall in the second half of this year.
Speaker: As a result of that, revised down our growth forecast for 21 from 5.1% to 4.5%.
Speaker: But probably more interestingly and importantly, for 22, we've revised our growth numbers down from 2.8% to 2.4%.
Speaker: So we do have a decent slowdown in the Australian growth story factored in now.
Speaker: So, Paul, how are policymakers responding?
Speaker: So they've stepped up with decent fiscal support.
Speaker: We've seen it at both the state level from New South Wales government and also the federal level in terms of particularly supporting the jobs market in the face of the lockdowns that have been delivered.
Speaker: But these fiscal measures are not nearly as large as we saw earlier.
Speaker: in last year's lockdowns and in the initial missile phase of the COVID shock.
Speaker: So we still think that the fiscal impulse is going to be fading overall.
Speaker: It's not going to be as big a support now as it was earlier on, despite these measures that have been announced.
Speaker: And we think the RBA is going to remain dovish.
Speaker: They've remained dovish all through this, and we think they're going to remain in that stance.
Speaker: That's an excellent summary.
Speaker: Paul, great talking to you today.
Speaker: Thanks very much.
Speaker: Thank you.
Speaker: Nine big themes form a key part of our thinking here at Global Research, and in the fixed income market, we've long held the view that bond yields will stay lower for longer.
Speaker: This week, Steve Major, Global Head of Fixed Income Research, looked at why US Treasury yields have fallen back to the middle of their range for the year, having moved higher in the first quarter.
Speaker: Let's hear from him now.
Speaker: Now, during the first quarter, we can see those yields going up through what was known now as the reflation trade.
Speaker: And there was huge enthusiasm back then as many forecasters were doubling their GDP forecasts and projecting Treasury yields above 2% by the end of this year.
Speaker: What we've seen is the yields peaking out above the 170 level and since coming back right into the middle of the range.
Speaker: Now, I think some people are trying to explain this away with short covering, position squaring, et cetera, but that's a technical explanation.
Speaker: To me, there's something much more fundamental, and I'm gonna focus on four key drivers of what's taken the bond yield back into the middle of the range.
Speaker: So first of all, the peak optimism has passed and sentiment indicators seem to have gone past the top level.
Speaker: And as I said, it's a first quarter phenomenon when there was the peak optimism.
Speaker: Secondly, debt levels.
Speaker: We've always focused on this as a key driver for the longer run valuation on bonds.
Speaker: More debt is associated with lower yields.
Speaker: And there's nothing like the chance of a rate hike that brings all this into focus for both DM and EM.
Speaker: The third point is inflation.
Speaker: Now, as part of the reflation narrative, I think that inflation expectations were fully embedded in those bond yields.
Speaker: at the start of the year.
Speaker: And we saw 2.5% on five-year break-evens.
Speaker: That's pretty in line with what the Fed was hoping to see with its average inflation target.
Speaker: And this brings me to the last point, the fourth point.
Speaker: If rates were to go up, as some on the FOMC who are projecting that, we saw it in the June FOMC, it seems likely, especially given the big debt stocks out there in the global economy, that when rates do go up, they won't go to the level of the previous cycle.
Speaker: The Fed's been projecting the longer run rate at 2.5%.
Speaker: But the simple point is, the market was already trading with yields above that earlier this year.
Speaker: That's why we're stuck in the middle.
Speaker: That brings us to the end of today's macro viewpoint.
Speaker: Thank you to our guests, Simon Wells, Paul Bloxham, and Steve Major.
Speaker: From Pearson Mead, 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.
