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The Macro Viewpoint - Bond market spillover, Europe’s challenges and a quantum disruption
31 Plays3 years ago
We look at how UK gilts have been a source of volatility for global bond markets, consider how setting appropriate policy in Europe has become even harder and assess how quantum computing could disrupt the global economy.
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Transcript
Podcast Mission Introduction
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
Global Economic Insights: HSBC Macro Viewpoint
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You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
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Coming up this week, we consider what's next for the bond markets following the latest bout of volatility.
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We look at how setting policy in Europe has become even harder with inflation looking ever more persistent.
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And we hear about a new technology that could be on the cusp of disrupting industry and society, quantum computing.
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This podcast was recorded on Thursday, the 6th of October, 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
UK Gilt Yields and Global Impact
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Hello, I'm Aline Van Dyne.
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And I'm Piers Butler.
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We begin this week in the bond markets, where the dramatic recent rise in UK gilt yields has had global implications.
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Steve Major, Global Head of Fixed Income Research, joins us now.
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Steve, welcome to the podcast.
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Thanks for having me.
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So, Steve, what's the impact on global markets of this rise in gilt yields?
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Yes, well, through September, the gilt market dominated the price action in global bonds.
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There was one point when the 10-year yield was up 160 basis points.
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Some of the moves within a single day at the longer end were much more fierce.
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So you've had some huge volatility.
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And much of this was related to liquidations, related to pension funds in the UK and forced selling into a weak market.
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And it did have a spillover into global bonds.
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And sometimes people forget this.
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Bond markets are not working in a vacuum in isolation from one another.
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Most people assume that the treasury market is the lead, which it often is.
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But it's also true that in a typical year, you can have the German Bund market or the UK gilt market or even Australian bonds taking the lead.
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So it just so happened that it was the UK with this big dislocation in the market.
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that had an outsized influence on everything else.
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So even Treasury and Bund yields went up a lot through late September because of this.
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And central banks are tightening rates aggressively.
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What does this mean for the longer-term outlook?
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Well, all this is linked because most of us will be familiar with the mantra that central banks, in this case led by the Fed, tighten until there's a recession.
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or they break something.
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And the break something idea sort of refers to the global read across into other regions or sectors.
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So an event is,
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in somewhere that seems to be completely disconnected to your local place or your particular sector of the market can have an influence.
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And that's why I call it spillover.
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Others might use the word contagion.
US Yield Curve Analysis
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And here we have a situation whereby developments in the UK that look quite specific to the country and the recent policy proposals have had a
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have had a possible impact on the next steps from the US Fed, for example, or even the ECB.
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So I posit the idea that it might hasten the transition from the hawkish narrative that we have at the moment to something less hawkish and, dare I say it, in 2023, something a bit more dubbish.
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How has the volatility affected the shape of the yield curve?
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Well, yes, when you have huge moves in each day, so intraday volatility can see bonds move even in the US 15 basis points in a day in the longer end and even more in the shorter end, which are more sensitive to policy expectations.
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The tendency is for the yields on the front end to go up more quickly than the long end because of the hawkish narrative and vice versa.
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If we move towards thinking something different, then the yields at the front end go down faster.
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So in simple terms, that's directional.
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So when yields are going up, the curve tends to flatten or even invert.
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And it tends to steepen.
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So the front end goes down faster in a more dovish environment.
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So the temptation is to talk about inversions, but I've identified how, in fact, the U.S. curve has taken an M shape.
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So it goes up at the front, down into the middle, then up again.
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before falling at the long end.
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The overall inversions that we see in the two to 10-year sector for most global bond markets that have them seem to be fairly stable, which is interesting because I think the implications are that we are close to the peak in yields and preparing for the recession risks, but not necessarily at the end of the rate hikes.
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So there's a difference.
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The bond market tends to move in front of the policy and in front of the economic developments.
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Steve, that's a great summary.
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Thanks for your time.
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Thank you.
Europe's Inflation and ECB Policies
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The outlook for Europe looks increasingly challenging with the region facing persistently high inflation and slowing growth, all of which makes the job of policymakers even harder and raises the risk of a policy mistake.
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Simon Wells, chief European economist, is here to give us his thoughts.
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Simon, a tough economic backdrop for Europe.
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What are you expecting?
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Well, the first thing we're expecting is a bit more inflation.
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It's already double digit in the eurozone in the UK.
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It's probably going to remain around those levels for a while.
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And then we've still got more inflation in the pipeline coming from energy costs, costs to firms more generally, and also perhaps labour costs as well as unions and workers try to bargain for bigger pay settlements to insulate them from the inflation.
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Now, although some of the government measures will help support households and businesses and their spending, I still think, unfortunately, recession is unavoidable.
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Business indicators, consumer confidence, all of them really signalling that Europe's economies will probably be in recession by the fourth quarter of this year, if not before.
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So, Simon, you call your report the great mistakes.
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What in particular are you worried about?
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Well, I think one of the mistakes that policymakers could make is to, again, neglect some of the lessons of history.
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And in particular, the 1970s, we had a big backdrop of rising unit labour costs back then.
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We also had numerous headwinds to aggregate supply back then.
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I think that's got many parallels with today.
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Firms are going to have to move and adapt their supply chains.
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There is headwinds to supply in the form of climate and less global cooperation and protectionism.
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And all this acts as an ongoing cost shock hitting firms.
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So what can policymakers do in response to
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Well, what we're looking at, unfortunately, is probably a Europe where slightly more sluggish rates of growth coexist with slightly higher rates of inflation.
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And of course, this is a bit of a nightmare for Europe's central banks.
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In the near term, I think the ECB is going to press ahead with front loading its policy response.
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So we see a 75 basis point rate rise in October, 50 in December and 25 in February.
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At that point, it might pause because we expect the economy to
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to be in recession and inflation to be about at its peak.
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But given some of these pipeline core inflation pressures, that might turn out to be a mistake.
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And indeed, we then expect the ECB to resume its rate cycle later in 2023.
UK Fiscal Challenges
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And Simon, specifically on the UK, what can you say about the prospects there, given a lot of uncertainty in recent weeks?
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Well, the UK, I guess, risks making different types of mistakes.
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Of course, we've had a big fiscal announcement in recent weeks, and that really caused a bit of market turmoil.
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The Bank of England had to step in to steady the ship a little bit.
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Now, the question is, at what point are we going to restore a bit more faith in the UK's fiscal policy?
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Or are we going to get into a situation where fiscal policy in the UK and monetary policy in the UK are going to start to pull in very different directions?
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So over the medium term, I think the UK does face some very unique challenges and they are all outlined in the report.
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Simon, thank you very much.
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Thank you.
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I'm Harold van der Linde.
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And I'm Fred Newman.
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And you can find us under the banyan tree.
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Join us weekly on our new podcast where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
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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.
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Enjoy the rest of your podcast and we'll see you under the banyan tree.
Quantum Computing Basics and Potential
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We finish up this week with a look at a technology that could have the potential to disrupt almost every sector of the global economy.
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We're talking about quantum computing.
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Davy Jost, our thematic analyst for Disruptive Technologies, has just published a major report on the topic, and he joins us now.
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Davy, welcome to the podcast.
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Thank you for having me, Piers.
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So Davy, a bit of a challenge for you, but can you explain to me what is quantum computing in layperson's terms?
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Yeah, so Pia, in layperson's terms, so we have the traditional computer that we're using, recording this podcast on right now.
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So in a traditional computer, information is represented in bits as a zero and one, but whereas in quantum computing, it operates on something called the quantum bit or the qubit.
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So that is when a qubit is zero and one at the same time.
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And basically that means that
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that qubits can be exponentially more powerful than a traditional computer.
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Can I say that it's a bit like having the bits, but in almost a sort of three-dimensional sense?
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Absolutely.
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You can definitely visualize it that way, P.S.
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So when you say exponentially more powerful, what does that mean in practice?
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Yeah, P.S., look, I think, let me start with a quote from the venture capital firm, BestMount Venture Partners.
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They said that by the end of this decade,
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quantum computers will be a trillion times more powerful than the most powerful supercomputer on Earth today.
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They went on to say that this immense computational power that quantum computers can unleash would lead to life-changing medicines, more accurate weather forecasts, smarter AIs, longer-lasting batteries, safer space travel, sustainable energy sources,
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and benefits which society has even to discover.
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I think that sums it up really nicely, Piers.
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It's a pretty powerful statement.
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And in fact, there are already some practical applications today.
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Can you maybe give us a sense of that?
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Yeah, absolutely, Piers.
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Look, even though the universal quantum computer is decades away, today there exists sort of early versions of quantum computers.
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For example, in relation to our Future Cities theme, Mitsubishi Estate, a real estate company,
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We're able to use quantum computers to optimize routes for waste collection.
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And as a result, we're able to cut CO2 emissions by as much as 57%.
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It's great that we have some current applications, but you say in your report that we're not quite there yet.
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Why is that?
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So the reason we're not quite there yet at the moment, Pia, is because at the moment, as we talked about earlier on,
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quantum computers are made from something called qubits.
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So at the moment, the qubits are noisy.
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They are not very stable.
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So if we want to create more powerful applications, the technology has to improve that.
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It has to become more stable.
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So that will take a few years, probably even a decade before we get that PS.
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And with every sort of technological development, there are obviously the positives which you've talked about, but there are also risks.
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And indeed, I've read that quantum computers, when they're sort of fully launched, will be able to crack most of today's encrypted passwords.
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That sounds rather worrying.
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That's right, Kesa.
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Today, all our data is encrypted using mostly something called RSA encryption.
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And that uses sort of prime factorization.
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But what a quantum computer allows us to do is, maybe in a decade's time, is to break all that encryption.
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So yes, there are definitely risks to the quantum computing technology.
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But on the other hand, Piers, governments and companies are actually working on quantum proof encryption technology.
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So by the time, hopefully we'll get there, we'll be in a position to mitigate the risks also.
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Well, let's hope they get there first.
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But that's fascinating and plenty more detail in your report, Davy.
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So many thanks for joining us today.
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Thank you for having me, Pius.
Conclusion and Call to Action
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So that's it for another week.
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Thank you to our guests, Steve Major, Simon Wells and Davy Joes.
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And thanks to all of you for listening.
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We'll be back again next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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