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, where we speak to the economists and strategists behind some of our key reports published over the past week.
Speaker: Coming up this week, interest rates are now higher in the United States and the UK.
Speaker: We look at what's ahead.
Speaker: And we assess the key risks facing emerging market assets with geopolitical tensions, adding to an already challenging backdrop.
Speaker: This podcast was recorded on Thursday, the 17th of March, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: Two of the major global central banks held policy meetings this week against a backdrop of rampant inflation, soaring energy prices, geopolitical risks, and of course, COVID-19.
Speaker: In a moment, we'll find out what happened at the Bank of England, but we start in the US where the Federal Reserve has just delivered its first rate hike since 2018.
Speaker: Ryan Wang is our US economist and he joins me now.
Speaker: So Ryan, tell us about the FOMC's decisions.
Speaker: Well, the FOMC raised the federal funds target range by 25 basis points.
Speaker: That was anticipated.
Speaker: But what was notable was a decisive shift higher in the Fed's projections for policy rates over the next couple of years.
Speaker: And what that shows is that the Fed is committed to making monetary policy less accommodated with the goal of pushing inflation lower over the next several years.
Speaker: So the rate hiking cycle has started.
Speaker: How much further does it have to go?
Speaker: In the FOMC's new projections,
Speaker: The median forecast is now signaling 175 basis points of rate hikes this year and a further increase in 2023 up to a median rate of about two and three quarters.
Speaker: And so what's important about this is that that's actually above the Fed's estimate of a longer term neutral rate, which pegs at around 2.4%.
Speaker: So again, this shows
Speaker: a consensus amongst the policymakers that policy rates will be moved into restrictive territory in an effort to slow inflation.
Speaker: Ryan, any particular references to the conflict in Ukraine and the possible risks to the outlook?
Speaker: Well, the FOMC cited the conflict as a potential upside risk to inflation as well as a downside risk to growth.
Speaker: And this is quite important because we're a little bit more pessimistic on the growth side and the inflation side.
Speaker: We expect core inflation to remain
Speaker: a bit stickier for longer, and we see growth slowing a bit more significantly, especially in 2023 relative to the FOMC's projections.
Speaker: So it's clear that this will be something that has to be monitored closely and supply chain bottlenecks and issues are still going to be something that's weighing on global economic conditions for quite some time.
Speaker: Ryan, any further insights on quantitative tightening and the shrinking of the balance sheet?
Speaker: Yes.
Speaker: Well, Fed Chair Jerome Powell said in his press conference that a lot of progress had been made at the March meeting, and it sounds like we will get a clear picture about the structure in the form of balance sheet reduction when we see the minutes from this meeting in several weeks' time.
Speaker: And so we've maintained the view that the Fed will
Speaker: formally announced balance sheet reduction at either the May or the June FOMC meetings.
Speaker: The process should start soon afterwards.
Speaker: Hal has previously suggested that overall balance sheet reduction could last for about three years.
Speaker: And we've estimated that the amount of reduction in the first year could be at least $1 trillion.
Speaker: Brian, thanks so much for the update.
Speaker: Thanks, Selene.
Speaker: So the Fed has begun tightening.
Speaker: Here in the UK, the Bank of England has just delivered its third rate hike this cycle.
Speaker: The 25 basis point rise delivered today has taken bank rate to its pre-pandemic level of 0.75%.
Speaker: Liz Martin, senior UK economist, is here to give us the details.
Speaker: Hi, Liz.
Speaker: Welcome to the podcast.
Speaker: Thank you.
Speaker: So the Bank of England have just had their Monetary Policy Committee meeting, and I guess it's fair to say that the outcome was a lot more dovish than people had expected?
Speaker: Yeah, it really was.
Speaker: So in the run up to the meeting, we had expected a 9-0 unanimous vote for a 25 basis point hike.
Speaker: The questions we'd been getting from clients were, don't you think that some members will vote for a 50 basis point hike?
Speaker: Or do you think that a majority will vote for a 50 basis point hike?
Speaker: So expectations were that the BOE would be even more hawkish.
Speaker: In fact, this outcome was even more dovish.
Speaker: So one member of the committee, John Cunliffe, voted to not change rates at all, to leave them at 0.5%.
Speaker: And not only was there that dovish split vote, but also they toned down their language as well.
Speaker: So in the past, the Bank of England have told us that they expect that modest further tightening will probably
Speaker: be needed.
Speaker: In this statement, they said only that modest further tightening may be needed in the future.
Speaker: So first of all, we got this dovish vote with one person not wanting to change rates at all.
Speaker: And second of all, we got this more dovish language.
Speaker: Despite this, the Bank of England is still concerned about inflation.
Speaker: Yeah, they aren't concerned about inflation.
Speaker: They're saying now that they expect inflation to rise to 8% in April and possibly even higher in October when we get the update to the Ofgem household energy price cap.
Speaker: The issue is what you think that inflation news means over the medium term.
Speaker: Now, if you were taking a very hawkish standpoint,
Speaker: You could say the worry is this will feed through to inflation expectations, second round effects, maybe a wage price spiral, and you need to do more tightening to compensate for that.
Speaker: But the Bank of England have taken a different view.
Speaker: They think that the higher inflation, largely driven by energy, will act more as a tax on consumption.
Speaker: So it will hit people's real incomes.
Speaker: It will bear down on spending, on GDP, on employment, and ultimately,
Speaker: it will be disinflationary and mean that inflation is below target over the medium term.
Speaker: And that means that they don't need to do much more in the way of rate rises.
Speaker: But just to recap, what do you expect the Bank of England to do going forward?
Speaker: Well, despite these dovish communications, we do think that some further tightening is likely.
Speaker: but probably less than what the market's expecting.
Speaker: So the market expects rates to get all the way to about two and a quarter percent.
Speaker: And we think that is too aggressive because after all, there is some truth in what the Bank of England is expecting.
Speaker: The cost of living will bear down on consumption, growth, and ultimately we think mean that you don't need quite as much tightening or rate rises as the market currently expects.
Speaker: Liz, thank you very much.
Speaker: Thank you.
Speaker: We finish up with a look at emerging markets where the Russia-Ukraine crisis has added to an already difficult backdrop for EM assets.
Speaker: Ali Chakiroglu, emerging market strategist, has been looking at the outlook in more detail.
Speaker: Ali, you've identified a surge in financial stress as tensions have risen.
Speaker: What have you found?
Speaker: Indeed, our financial stress indicators show a sharp spike following the latest rise in geopolitical tensions.
Speaker: This is an indicator which takes into account all emerging market assets and is constructed using the similar methodology to St.
Speaker: Louis Fed's financial stress index.
Speaker: And the search in financial stress index clearly shows that investors have turned quite cautious on emerging markets prospects and are not willing to take EM risk for the time being.
Speaker: So how have emerging market assets performed so far this year?
Speaker: Well, 2022 haven't started all too well for risk assets, but for emerging market currencies and equities, things were moving broadly in the right direction until the escalation of geopolitical tensions.
Speaker: And after that, we have seen a sharp sell-off in all EM assets, and particularly in EM equities, which have plummeted by more than 15% from their peak in mid-February.
Speaker: On top of that, EM currencies have also weakened, though there are some diverging trends out there.
Speaker: Particularly worth highlighting is the divergence for EM commodity exporting currencies, which have done better compared to others.
Speaker: What impact will the higher commodity prices have on the outlook for emerging markets?
Speaker: Well, rising commodity prices are likely to complicate the outlook for emerging markets for two reasons.
Speaker: The first reason relates to the higher share of food and energy in CPI baskets, which implies that upside inflation risks will remain alive.
Speaker: And the second factor relates to the higher share of energy in production costs, which means that there are downside risks to economic activity.
Speaker: In a way, higher commodity prices would imply a stagflationary backdrop, which is not positive for emerging markets.
Speaker: So which economies are the winners and losers from higher commodity prices?
Speaker: Although many EM economies are commodity producers, when we look at the net commodity trade, not all of them are going to benefit from rising commodity prices.
Speaker: It means that there will be some winners as much as losers.
Speaker: The net commodity trade balance remains the largest in UAE, followed by Chile and Saudi Arabia.
Speaker: Colombia and Nigeria also stand out to benefit from rising oil prices.
Speaker: Meanwhile, Asian economies stand on the other end of the spectrum and are likely to have negative implications from rising commodity prices.
Speaker: Ali, thanks very much.
Speaker: Thanks, Alin.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Ryan Wang, Liz Martins, and Ali Chakiroglu.
Speaker: 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.
