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, and now onto today's show.
Speaker: The following podcast was recorded on the 27th of July, 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Remember, you can now subscribe to this weekly podcast on Apple and Spotify, or wherever you get your podcasts, by searching for The Macro Brief.
Speaker: And don't forget to give us a rating.
Speaker: Now, on to the podcast.
Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm Piers Butler in London.
Speaker: It's been a big week for central banks on both sides of the Atlantic.
Speaker: Both the Fed and the European Central Bank have raised borrowing costs again.
Speaker: But on today's programme we'll be asking how close are we to the end of the monetary tightening cycles in the US and Europe.
Speaker: We start with the Fed, which on Wednesday delivered its 11th rate increase since March 2022, this time by 25 basis points.
Speaker: But was this the final hike in the battle to tame the inflation that erupted across many parts of the world after the end of COVID-19 lockdowns?
Speaker: Ryan Wang, our US economist, is in New York with Eileen Van Dyne.
Speaker: So Ryan, another 25 basis point hike.
Speaker: Is this finally the last one?
Speaker: Hi, Eileen.
Speaker: Well, on our forecast, it is the FOMC voted unanimously to raise the federal funds target range by 25 basis points up to five and a quarter to five and a half percent.
Speaker: And we are forecasting that this target range will be maintained until the second quarter of 2024, where we forecast the beginning of some modest rate reductions from the Fed.
Speaker: Now, the FOMC itself, I think, is still trying to determine whether the current federal funds rate is sufficiently restrictive to bring inflation lower.
Speaker: When asked about this question, Fed Chair Powell in his press conference basically said that he could see the committee voting to raise rates in September or the possibility of the Fed leaving rates unchanged.
Speaker: It will come down to the economic data that we see over the next couple of months.
Speaker: So Ryan, it's all about watching the data.
Speaker: Tell us a bit more specifically which data we should be watching out for.
Speaker: Well, I think the key focus is still very much on inflation.
Speaker: And I think the most relevant measure for FOMC policymakers is the core PCE inflation rate.
Speaker: Now, that inflation rate has remained above 4.5 percent for most of this year.
Speaker: We think it will soon fall to just above 4 percent.
Speaker: And by the end of this year, we think it will be a bit below 4 percent.
Speaker: That actually matches the FOMC's most recent median forecast for core PC inflation by the end of this year.
Speaker: And that may be the type of progress the policymakers need at a minimum to stop raising policy rates.
Speaker: As well, the policymakers will be closely watching what's happening in the labor market where we see some evidence of gradual cooling.
Speaker: Businesses are saying it's become a little bit easier to attract workers to hold on to their existing workforces even though other businesses still say that broad labor market conditions are tight.
Speaker: So it's really a question of seeing whether the trends that have begun to emerge in recent weeks continue over the remainder of this year.
Speaker: So Ryan, either this is the last hike or we're very close, but markets of course always look ahead and already the markets are pricing in substantially more rate cuts than you're expecting.
Speaker: Just talk us through your relatively more hawkish views in terms of what will happen in 2024.
Speaker: Well, I think what's most important to keep in mind is that rate cuts are not going to be delivered on a calendar, irrespective of any particular forecast.
Speaker: It's going to be dependent on realized progress for lower inflation and also whether the FOMC policymakers believe that progress towards 2 percent inflation can continue.
Speaker: It's not the case that the Fed will simply continue hiking rates or even leave rates at a high level all the way until inflation is back at 2 percent.
Speaker: But there needs to be significant progress in terms of how the policymakers are evaluating the economic situation.
Speaker: So this is going to be increasingly important over the year ahead.
Speaker: For the remainder of this year, I think what's crucial is to see the start of that progress for lower core PC inflation.
Speaker: And then by the middle of next year, it'll be key to see whether that progress has continued.
Speaker: Thanks, Ryan.
Speaker: And just talk us through more broadly your views on the U.S. economy.
Speaker: It looks like it will be a relatively soft landing, right?
Speaker: Well, I would say that so far this year, the U.S. economy has shown a surprising degree of resilience.
Speaker: That has included what's happened to GDP growth and also what's happened to
Speaker: broad labor market conditions, and overall employment growth.
Speaker: We do expect that growth both on the output side and the employment side will continue to slow over the next six to 12 months.
Speaker: That should prompt some gradual increases in unemployment, but that also will help take some of the pressure off on the inflation side.
Speaker: Ryan, thanks for the update, and we'll be watching the data closely.
Speaker: Thanks so much, Aline.
Speaker: Like the Fed, the ECB also hiked rates by 25 basis points at today's meeting, taking the deposit rate up to 3.75%.
Speaker: But the big question ahead of the meeting was whether the bank would send a strong signal around further rate rises.
Speaker: Fabio Balboni, senior European economist, joins me in the studio.
Speaker: Fabio, welcome to the macro brief.
Speaker: Thank you very much.
Speaker: So, Fabio, yes, no big surprise.
Speaker: 25 basis points.
Speaker: Everybody was expecting that.
Speaker: But what did they say?
Speaker: Well, actually they did not send a strong signal for September.
Speaker: Previously they had a so-called tightening bias in the rate guidance suggesting there would have been further rate hikes ahead.
Speaker: That tightening bias has been dropped, so in particular the language was changed from rates will be brought to restricted levels in the future to rates will be set at a restricted level in the future.
Speaker: seemed like a small change, but when you think in terms of expectation, it suggests that the ECB might increase rates or might pause.
Speaker: And indeed Christine Lagarde was pretty clear during the press conference that that means the ECB has now moved into a fully data dependent mode and there's almost an equal chance that they might increase rates or pause in September and that will depend on the data between now and the September meeting.
Speaker: So what was behind that change in stance?
Speaker: Well, largely in our view, and to some extent that was reflected in the statement by the ECB, has been the recent deterioration on economic activity data.
Speaker: So the language of the ECB has changed significantly in terms of the effectiveness of the monetary transmission channel.
Speaker: Christine Lagarde said very clearly that there are signs, clear signs, that the monetary tightening is starting to affect the economy, particularly through aggregate demand.
Speaker: If you look at some of the latest data, indeed we've seen quite a sharp deterioration in some of the
Speaker: economic activity indicators, particularly the PMIs, have deteriorated further in June and even more in July.
Speaker: And it's not just manufacturing, which has been fairly weak throughout the year, but most recently also the services sector is starting to slow down more significantly.
Speaker: as well as the credit data, some of the latest data suggested has been a further tightening of credit standards by the banks and loan demand is falling pretty sharply both by corporates and households.
Speaker: So both those indicators on the activity side and on credit side, they point indeed to a slowdown in growth
Speaker: in the eurozone in the second half of the year and if we look back at the ECB forecast in June, they were actually looking for growth to pick up rather than slow down.
Speaker: So certainly that change and that fading of the growth momentum is something that would have increased the perception among the ECB governing council about the risk of over tightening and therefore push them towards a more data dependent mood at the September meeting.
Speaker: And has that changed your view regarding what's going to happen at the September meeting?
Speaker: Well, the other important part of the equation is, of course, inflation.
Speaker: And inflation instead did not surprise to the downside.
Speaker: Quite the opposite.
Speaker: If we look at the June inflation print, core inflation was back up, increased by 0.2%, from 5.3% to 5.5%.
Speaker: Still very uncomfortable levels and Christine Lagarde was very clear of that, including if you look at the previous ECB forecast, inflation doesn't fall back towards the ECB target all the way until the end of their forecast horizon which is 2025.
Speaker: So clearly that remains at the forefront of the ECB concerns.
Speaker: If you look at the data between now and September, we're going to have two key inflation prints, the July and the August, and our expectation for those two prints is that core inflation will not fall.
Speaker: We got core inflation holding steady at 5.5%.
Speaker: And at the same time we've got several members of the governing council that are saying unless we see clear signs of underlying inflation falling sustainably towards our 2% target, we have to keep hiking.
Speaker: So if you put together these two pieces of information, it is still hard for us to see the ECB pausing in September.
Speaker: So we've maintained
Speaker: our call for a 4% peak rate in September.
Speaker: But certainly following today's communication I would say that the risks are skewed to the downside.
Speaker: So it's a more open meeting than what we previously thought and certainly there will be a lot of focus on those upcoming inflation print.
Speaker: In your conversations with investors, how do you think people are positioned?
Speaker: I mean, I sort of get the sense that people are quite well positioned.
Speaker: There's anticipation that we've seen peak rates, that inflation is on the downside.
Speaker: Is there a risk that that consensus could change with the data that you've just been talking about?
Speaker: You're right.
Speaker: To some extent, the market pricing is quite contained within a very narrow range.
Speaker: You might think that there's going to be another 25 basis points, you might think not, but there's very few that think that the ACB could take rates above 4%.
Speaker: In fact, we looked at the Bloomberg consensus recently and nobody's forecasting a peak rate higher than 4%.
Speaker: Again, if we look at the ECB communication today, even though they dropped that tightening bias for September, as I said, Christine Lagarde said very clearly that even if they might pause in September, they might have to revert back to high crates in the future, so they maintain a hawkish bias overall.
Speaker: And again, if you take the bigger picture in terms of the inflation forecast, underlying inflation pressure are still building up, we've seen wages still rising and that's all part of a lagged impact of the past inflation on wages and with that underlying inflation pressure could remain high.
Speaker: Plus, of course, there is the risk that maybe you could have a renewed energy crisis heading into the winter that could push up energy price and that could also feed through to inflation.
Speaker: So absolutely, there is a risk that actually the ECB might end up having to be more aggressive and that doesn't seem to be priced in as a risk from a market perspective at the moment.
Speaker: So we've had the Fed, we've had the ECB.
Speaker: Can you give us a quick preview on the Bank of England next week?
Speaker: Indeed, last but not least, the Bank of England, and indeed one of the most difficult choices.
Speaker: Because again, also in the UK, inflation actually did surprise to the downside there, and activity data have been...
Speaker: However, we're still looking for a 50 basis point increase by the Bank of England.
Speaker: There will be a lot of pressure in terms of credibility of communication after the latest 50 basis point rise and the Bank of England has been clear that there is still quite a lot of work to do in terms of rate hikes.
Speaker: But the market pricing has fallen significantly in terms of peak rates.
Speaker: following some of the latest dovish data.
Speaker: So it could be, again, quite a difficult meeting.
Speaker: And certainly we could see some council members at the Bank of England positioning themselves for a lower than 50 basis point rate rise or even no rate rise at all.
Speaker: So it could be quite an interesting meeting to follow.
Speaker: Okay, well, let's see what happens.
Speaker: Fabio, thank you very much for joining us today.
Speaker: Thank you very much.
Speaker: Fabio Balboni there on European Monetary Policy.
Speaker: Thanks to him and Ryan Wang for talking to us today.
Speaker: Before we go, just a couple of quick things.
Speaker: Don't forget that you can subscribe to the podcast on Apple and Spotify or wherever you get your podcasts by searching for the Macro Brief.
Speaker: And finally, HSBC clients can sign up to our Global Emerging Markets Conference, which is taking place online from the 18th to the 29th of September.
Speaker: Get in touch with your HSBC sales representative if you'd like to get your name down for that.
Speaker: So that's it from us.
Speaker: Thanks to all of you 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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
