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.
Speaker: And now onto today's show.
Speaker: 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.
Speaker: It's been a big week for central banks on both sides of the Atlantic.
Speaker: We assess the monetary policy paths of the US and the UK following large rate rises.
Speaker: And as the dollar shows further signs of strength in a whipsawing market after the Fed's meeting, we assess the pressure on currencies in the emerging markets.
Speaker: Plus, has the countdown to a power shift in Washington begun?
Speaker: We preview the issues to watch in next week's U.S. midterm elections.
Speaker: This podcast was recorded on Thursday, the 3rd of November 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm P.S.
Speaker: Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: We begin this week here in the US where the Federal Reserve has delivered its fourth hefty rate rise in as many meetings.
Speaker: And next week, attention shifts to key congressional elections that could shift power into Republican hands.
Speaker: Ryan Wang, US economist is here to give us the details.
Speaker: Ryan, let's start with the FOMC.
Speaker: What were the key takeaways?
Speaker: Well, Fed Chair Jerome Powell made it pretty clear that if the FOMC had been making new projections about how far to take policy rates, that they would have been higher after the most recent incoming economic data than they were back in September.
Speaker: And so mainly what this refers to is incoming information that suggests that inflation is staying elevated and that labor market conditions are very tight.
Speaker: And as a result, it looks like the FOMC quite possibly will be looking to take policy rates
Speaker: close to the 5% level.
Speaker: That's what we've incorporated into our own forecast for federal funds.
Speaker: We expect another 100 basis points of rate hikes, 50 basis points in December, and 50 basis points in February 2023.
Speaker: Now you've said that risks are skewed towards higher rather than lower policy rates.
Speaker: What are the key data points to watch out for?
Speaker: Well, I think what's going to be key are the various different types of data on the labor market.
Speaker: So that does include the monthly jobs report, but it also includes other indicators such as the number of job openings, the number of monthly gross hires that are happening each month, layoffs, quit rates, and also importantly, what's happening to wage pressures.
Speaker: Labor market tightness is contributing to sticky high inflation
Speaker: through the tightness of the labor market and through the difficulties that businesses are having in hiring workers to fill job positions.
Speaker: So the Federal Reserve will be looking at all these indicators and then perhaps most importantly, the policymakers will be looking to see what actually happens with the inflation data.
Speaker: Part of the reason that Powell's comments were so striking is because they show that the FOMC is laser focused on each month's economic data releases
Speaker: and that the eventual level of policy rates, what the FOMC will deem as sufficiently restrictive, is going to change depending on what the data show.
Speaker: And another big issue, Ryan, are the congressional midterm elections on the 8th of November.
Speaker: What are the issues to watch out for there?
Speaker: Well, historically speaking, in midterm elections, the president's party often loses congressional seats.
Speaker: And the
Speaker: It looks like this pattern may repeat itself in the upcoming midterm elections, and it's possible that Republicans will take control of one or both chambers of Congress.
Speaker: Now, the immediate legislative implications for such a shift are somewhat ambiguous because the president would still retain a veto power over any legislation, so it wouldn't necessarily, for example, mean
Speaker: a change in laws that were enacted over the course of the last two years.
Speaker: Now, if the polls are wrong and Democrats were to increase control, particularly in the Senate, picking up seats in the Senate and maintaining control of the House of Representatives, then the impact on legislation could be much more significant.
Speaker: We could see aspects of the Democratic policy agenda start to come through.
Speaker: A final consideration is that
Speaker: If we do have divided government after the midterm elections, we could see a return to fiscal frictions, perhaps even in the way that we saw back in 2011, where financial markets had to watch very closely for government funding and debt limit deadlines that created potential volatility and disruptions.
Speaker: Depending on the outcome of the midterm elections, we could be setting up into a situation where those issues will become very relevant again in 2023.
Speaker: Ryan, thanks for the update.
Speaker: Thanks, Aline.
Speaker: It's been a challenging few weeks for the UK economy.
Speaker: And at its November meeting, the Bank of England followed the Fed with a 75 basis point rate rise, its biggest increase in decades.
Speaker: We're joined by Liz Martins, Senior UK Economist.
Speaker: Liz, welcome to the podcast.
Speaker: Thank you.
Speaker: So, we've just had the biggest rate hike in 30 years and yet it's being said that it's dovish?
Speaker: I don't understand.
Speaker: I know.
Speaker: It does sound a bit unusual, doesn't it?
Speaker: Yeah, it's dovish in three ways.
Speaker: The first is that you had two members of the Monetary Policy Committee who wanted a smaller rate rise.
Speaker: One wanted 50 basis points.
Speaker: That was Swati Dingra.
Speaker: And one only wanted 25 basis points.
Speaker: That was Silvana Tenrero.
Speaker: So, the dissent was in a dovish rate.
Speaker: direction as opposed to members wanting more bigger rate rises.
Speaker: The second was the inflation forecast because the Bank of England said if rates rise according to what the market was pricing in, so to about just over 5% over the next year or so, then inflation will fall to 1.4% in two years, so below the 2% target,
Speaker: And then to 0% in three years, which is the biggest undershoot it has ever forecast.
Speaker: It's saying that that rate profile is way too high.
Speaker: So that's sending out a dovish signal.
Speaker: And the final dovish element of this rate decision, monetary policy report, was the wording in the statement where the monetary policy committee said that further rate rises may be required.
Speaker: And, you
Speaker: Although they did say in the press conference that they thought it was likely that further rate rises would be required, this is a downgrading of the guidance about future tightening.
Speaker: So yes, it was the biggest rate rise in 30 years, but it still managed to be dovish.
Speaker: And interestingly, no account seems to have been taken of the prospect of fiscal tightening that the government may announce on the 17th of November.
Speaker: That's right.
Speaker: So it's been a roller coaster, of course, on fiscal policy.
Speaker: The government, first of all, was trying to process for all those policies in the so-called mini budget, the loosening.
Speaker: A lot of those have now gone, but we know that we're going to have a budget on the 17th of November, which in all likelihood is going to bring fiscal tightening.
Speaker: Now, I think it's fair enough that they haven't taken account of that.
Speaker: We don't know what will be done.
Speaker: We don't know over what time frame.
Speaker: It may be nothing to do with what's happening in sort of two to three years, which is the horizon the Bank of England's working on.
Speaker: But what it does mean is that when that budget happens, if there is more fiscal tightening,
Speaker: then that suggests that they're already forecasting a long recession into 2024.
Speaker: That could be even worse if you add in the government being in belt tightening mode as well.
Speaker: So that could bring growth and inflation down even more than this already quite bearish scenario that they've published.
Speaker: Also, a quick question on quantitative tightening.
Speaker: What's the outlook there?
Speaker: I know it started and it has gone better than people had expected.
Speaker: What's the outlook there?
Speaker: That's right.
Speaker: So no change there.
Speaker: The Bank of England is aiming to reduce the balance sheet by £80 billion in the first year.
Speaker: It set out a schedule of auctions.
Speaker: At the time of recording, it had already done one.
Speaker: And as you say, it had gone very smoothly.
Speaker: In fact, the market had welcomed it because it provided liquidity that's been missing.
Speaker: So, so far, quantitative tightening, I would say, is going well and isn't really likely to change.
Speaker: It's on kind of autopilot for now.
Speaker: And taking all this into account, you've changed your forecast.
Speaker: Can you tell us what they are now?
Speaker: Yeah, we have.
Speaker: So we published our previous interest rate forecast on the 23rd of September.
Speaker: That was the day of the so-called mini budget.
Speaker: And it took into account all those tax cuts that LizTrust had announced.
Speaker: Now, most of those have gone.
Speaker: So the conditions have changed a lot.
Speaker: So previously,
Speaker: We were forecasting for bank rate to peak at 4.25 in March.
Speaker: We now see just two more rate rises from here.
Speaker: 50 basis points in December, 25 basis points in February and then stop.
Speaker: So that gets us to 3.75.
Speaker: So 50 basis points lower than what we were forecasting previously.
Speaker: Liz, thanks very much.
Speaker: Thank you.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Newman.
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Speaker: We finished this week in the FX markets, where our team has been looking at what the pace of Fed rate hikes and the potential peak for the US dollar could mean for emerging market currencies.
Speaker: Let's get the thoughts of Paul Mackle, Global Head of FX Research.
Speaker: He spoke to Graham Mackay in Hong Kong earlier.
Speaker: Paul, good to have you back with us.
Speaker: Thank you very much.
Speaker: So you're back from a big trip.
Speaker: You've been speaking to a lot of investors around the world.
Speaker: What's the key issue that they've been wanting to discuss?
Speaker: Well, one of the main topics of discussion, no surprise, is can the dollar keep strengthening?
Speaker: And, you know, we've been of the view for quite a long time, pretty much since the third quarter of 2021, that the dollar would be outperforming.
Speaker: And it does seem that global investors have been buying into this resilient dollar more and more over the last number of months.
Speaker: But again, it's climbing a wall of fear.
Speaker: Can't keep going is probably one of the biggest questions that's been coming up.
Speaker: And we've just seen another 75 basis point hike from the Fed.
Speaker: Clearly, they're not done yet.
Speaker: How does that inform your thinking on dollar strength moving forward?
Speaker: Well, certainly it reinforces our thinking that the dollar is not done just yet.
Speaker: And we can see the short term price action in response to that FOMC or Fed meeting or Powell's comments that the dollar should actually still be in a very strong position.
Speaker: So it's grinding higher.
Speaker: And obviously, that's an important headwind for many currencies, including those in the emerging world.
Speaker: So does that imply that things are going to stay relatively tough for EMFX with a stronger dollar?
Speaker: The short answer is yes, increasingly it's become all about the dollar over the last few months.
Speaker: So we think it's a little bit too early to say that there's going to be greater differentiation emerging for emerging market currencies.
Speaker: Nonetheless, when the Federal Reserve does finish raising interest rates and going on that very prolonged pause, perhaps that changes some of the dynamics for emerging market currencies.
Speaker: But as I mentioned, it's too early to buy into that process just yet.
Speaker: And can we explore that for a minute?
Speaker: Because I believe you've been looking at some sort of historical precedence for when the Fed has peaked and what that has implied for EMFX.
Speaker: Absolutely.
Speaker: So what you can see is just that the volatility in the broader dollar tends to come down.
Speaker: And that, I think, is a precursor for greater differentiation for
Speaker: many different currencies so that's just less tethered to what the dollar is doing on a day-to-day, week-to-week basis.
Speaker: So it allows more room for local or idiosyncratic factors to emerge.
Speaker: And that I think ultimately will happen sometime next year, but it's too early to call for that right now.
Speaker: And I mean, since we clearly don't know when that Fed peak is going to come exactly, the challenges will remain for emerging markets FX presumably in that time.
Speaker: Are there any that you see being more resilient than others?
Speaker: Yes, we do see a handful of emerging market currencies being relatively more stable or being a better position to outperform versus even the dollar in the months and quarters to come.
Speaker: So my colleague Joseph in Calcaterra has been fairly upbeat on the outlook for the Brazilian real and also the Mexican peso.
Speaker: And there's perhaps a couple of other ones that can hold its own versus the strong dollar, such as the Singapore dollar.
Speaker: But we're really not spoiled for choice for emerging market currencies in terms of what to like.
Speaker: which sadly probably means that it's more of a relative value story within EMFX to find those opportunities.
Speaker: And just to focus finally on central banks other than the Fed, here in Asia, I believe you've been taking quite a close look at central bank policy and how that might be influencing Asian currencies.
Speaker: What's the thinking there?
Speaker: Well, we regularly track Asian FX policy because it's such an important determinant how it feeds into Asian currency performance.
Speaker: And for the most part, and no surprise, that we can track the intervention behavior.
Speaker: And there's been strong smoothing efforts, particularly through the third quarter, as that strong dollar has been coming through.
Speaker: So I think that's still a message there, that Asian central banks don't want their currencies to be weakening too fast, too aggressively.
Speaker: But nonetheless, you have to pay close attention to shifts in Asian FX policy, because it could open windows for these currencies to weaken at a faster pace.
Speaker: Paul Mackel, thank you very much indeed.
Speaker: Thank you very much.
Speaker: So that's all from us this week.
Speaker: Thanks to our guests, Ryan Wang, Liz Martins and Paul McEl.
Speaker: From all of us here on the team, thanks 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.
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