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, a roundup of our key reports published over the past week by our team of economists and strategists.
Speaker: Coming up today, we consider whether the Bank of England is set to raise its key interest rate at its November meeting.
Speaker: And we assess Asia's plans to transition to cleaner energy and consider what's next for the dollar.
Speaker: This podcast was recorded on Thursday, the 21st of October, 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Chris Brown-Hulmes.
Speaker: We start this week here in the UK.
Speaker: The past month has seen a huge shift in monetary policy expectations with investors now pricing in a much more aggressive pace of tightening by the Bank of England.
Speaker: With the bank set to meet on the 4th of November,
Speaker: Simon Wells, chief European economist, has been looking at whether markets have got it right.
Speaker: He joins me now.
Speaker: Simon, the market now seems to be pricing in a rate rise already in November.
Speaker: That's quite a big turnaround in just a few weeks, isn't it?
Speaker: It certainly is, Chris.
Speaker: The market is now pricing about 20 basis points of rate rises on the 4th of November and around 60 basis points of policy tightening.
Speaker: between now and next February.
Speaker: Now, compare that to where we were at the time of the Bank of England's August monetary policy report, and you had 60 basis points of tightening price in over about three years.
Speaker: And in fact, over the past month, the rise in implied policy rates six months forward has been one of the biggest on record, even including the pre-global financial crisis period where the level of policy rates was 5% or so.
Speaker: So why are investors taking this view suddenly?
Speaker: Well, I think because the supply disruptions and upper price pressures that they bring have persisted longer than anyone expected at the start of the year.
Speaker: There is an increasing risk that the longer inflation is higher, that it feeds through into expectations and pay demands.
Speaker: But more generally, I think the market has been affected by comments from the MPC members.
Speaker: Obviously, the governor at the weekend sent another signal that the bank will have to act.
Speaker: And if you know that you're going to tighten policy, why wait?
Speaker: There has been little pushback from MPC members.
Speaker: And of course, if the market's expecting higher inflation,
Speaker: It could become self-fulfilling.
Speaker: So the market is looking at the lack of pushback.
Speaker: A lot of this near term inflation news in terms of energy prices and supply disruptions and thinking, yeah, why wait?
Speaker: But economists, yourself included, are much more cautious and not expecting interest rate rises to come through so quickly.
Speaker: Why the difference?
Speaker: I think because economists are focused a bit more on the medium term inflation outlook, that is something the Bank of England can do something about.
Speaker: It can't influence global energy prices right now.
Speaker: And much of the inflation that we're seeing, high as it is and rising, it should still prove to be temporary.
Speaker: So we're expecting a lot of it to come down.
Speaker: Yes, some tightening of policy is probably required.
Speaker: But generally, inflation should come back down in 2023 as all these effects drop out.
Speaker: There is also downside risk to demand.
Speaker: The focus is rightly on supply.
Speaker: But the UK consumers are about to have a big income squeeze in the form of tax rises and inflation eroding real terms income.
Speaker: And of course, there is unfortunately a growing COVID risk in the UK.
Speaker: Not only that, you've got potentially the end of the job retention scheme to observe in hard data.
Speaker: So there is a value of waiting a little bit longer.
Speaker: You put all that together.
Speaker: And I think economists feel that the news on the medium term inflation outlook doesn't really warrant a move as big as the market has put in.
Speaker: And finally, Simon, could you just remind us of what our forecasts are for rate risers?
Speaker: Well, Chris, in line with the economist consensus, we expect the first rate rise to come in February of 2022 with a 15 basis point rise.
Speaker: We then have 25 basis point increases in August of next year and February 2023.
Speaker: So a much shallower path of tightening than is currently priced in by the market.
Speaker: But as I say, the important point is that based on the kind of medium term outlook, the path of the market looks a little aggressive.
Speaker: And that's perhaps more important of whether the cycle begins in November or December or February.
Speaker: Simon, that's a very good summary.
Speaker: Thanks so much for your time today.
Speaker: Thank you.
Speaker: Energy transition is a key theme for us here at Global Research.
Speaker: This week, we're going to take a closer look at how Asia is aiming to move its energy systems away from fossil fuels towards greener technologies.
Speaker: Joseph in Calcutta is our chief ASEAN economist, and he caught up with Fred Newman, co-head of Asian Economic Research, earlier.
Speaker: Fred began by outlining the near-term impact of recent energy price surges and power shortages.
Speaker: The headlines have been chock full with the news that energy prices have risen very sharply.
Speaker: Coal, natural gas, oil pushing higher in price terms.
Speaker: And we have energy outages, electricity outages across the region.
Speaker: Now, in the near term, that clearly has an inflationary impact.
Speaker: But the impact on inflation differs really across economies, with some of the less developed markets possibly seeing a bigger impact on inflation than others.
Speaker: But don't forget that the rise in energy prices also represents a major drag on economic growth.
Speaker: The region for the most part is a massive energy importer and higher energy prices act as a tax on growth.
Speaker: And that means that central banks will likely look through the initial spike in energy prices focusing more on the medium-term impact on economic growth.
Speaker: and core inflation in fact in Asia may not rise that rapidly allowing central banks to wait and see and take their sweet time before they really push up interest rates.
Speaker: So those are the near-term implications.
Speaker: But what about the transition from fossil fuels to a more sustainable and renewable source of energy?
Speaker: Joseph, we have seen a big rise in prices.
Speaker: Does the transition, the energy transition, mean that prices will remain high for quite some time?
Speaker: Yeah, Fred, so to answer that question, we look at the energy transition plans, particularly in the power sector, because that's really going to be driving growth across the region.
Speaker: And what we find is that despite ambitious plans to boost renewable energy capacity across the board in Asia, actually over the next few years, it's really going to be fossil fuels that meet most of the demand for electricity.
Speaker: And that's because due to grid limitations and a need for better storage, actually, renewable capacity can't meet all the demand.
Speaker: So what we find is that coal demand is going to continue rising until 2025 in Asia, and natural gas demand probably won't peak until 2035.
Speaker: Even under a very ambitious net zero scenario, as outlined by BP, natural gas demand will probably continue rising throughout the 2020s.
Speaker: And because production is somewhat limited, it means that prices will probably stay elevated over the next few years.
Speaker: And are the economies that are benefiting from these trends, from this transition that you examine?
Speaker: So the net energy exporters, Malaysia, Indonesia, Australia, they benefit.
Speaker: But it's really Indonesia that stands out.
Speaker: And that's because it's the world's largest exporter of coal, palm oil, and net gas exporter as well.
Speaker: As a result, it's really seeing a significant boom in its terms of trade and that's really buttressing the balance of payments.
Speaker: This matters for Indonesia because it allows the central bank to have more policy flexibility, it allows the government to provide more fiscal stimulus.
Speaker: So it's really Indonesia that's benefiting the most from this dynamic and will probably continue to benefit over the next two years.
Speaker: And where in the region do you see the most ambitious transition plans to move away from fossil fuels to renewables?
Speaker: So as the economy is with the largest populations and growth potential, it's really China, India have the most ambitious plans.
Speaker: And actually, they have been meeting their targets, actually, if you look at the annual increases in capacity.
Speaker: But because you still need more investments in grid and technology, for example, we find that the increase in investment in renewables capacity is not meeting all the electricity demand.
Speaker: And that's really seen in China with the latest power crunch.
Speaker: So the plans are very ambitious there.
Speaker: They're being met.
Speaker: We still need to see many more investments in grid and technology.
Speaker: We also see pretty ambitious plans in Southeast Asia.
Speaker: Vietnam really stands out, not only because of the scope of its renewables targets, but also because the power sector is going to continue growing very sharply in Vietnam.
Speaker: on the back of the economy's growth potential.
Speaker: Now this isn't cheap.
Speaker: How do countries propose to finance the transition from fossil fuels to renewables?
Speaker: Indeed.
Speaker: So we look at some estimates for the installation costs of these renewables and actually it can be quite high.
Speaker: In the case of Vietnam, over 2% of GDP per year, for example, and that ranges across the region.
Speaker: Financing proposals are really not yet fully developed at this stage, but actually COP26 is going to provide a very good impetus for this, probably because you're going to see renewed financing commitments from multilateral investment banks, from donor countries, and that could actually provide quite a bit of support and allow countries to have a bit more clarity on how we finance that.
Speaker: But it's really to be determined, and it's going to be something we look at in a future installment of this series.
Speaker: Thank you, Joseph.
Speaker: We finish this week in the currency markets, where our team has been looking at what the growth and monetary policy outlook could mean for the dollar.
Speaker: Paul Mackle is our global head of FX research, and he joins us now from Hong Kong.
Speaker: So, Paul, as we near the end of 2021, what are you and the FX team focusing on heading into the new year?
Speaker: Absolutely.
Speaker: We are very much in the final stretch of 2021.
Speaker: It's been quite a bumpy period.
Speaker: for the FX market this year, but our thinking has been focused on the dollar still gradually strengthening.
Speaker: Now, it's never a smooth path, as we know, and even recently, the dollar has been correcting lower.
Speaker: But ultimately, we believe two forces will continue to support it on a longer term basis.
Speaker: One is just some moderation in the global growth outlook.
Speaker: And the second thing is that the Fed will be on the runway to taper, but also eventually raise interest rates.
Speaker: In terms of the Fed's language recently, have you noticed any changes?
Speaker: And if so, how does that inform your outlook?
Speaker: Well, it's a very good question.
Speaker: And we can see how the dollar has become increasingly sensitive to shorter term interest rates or yields, predominantly the two year yield, which has been a very influential force, as I said, for many exchange rates.
Speaker: So the Fed's forward guidance can actually impact that.
Speaker: And when we're tracking the language with regards to inflation from someone like Chair Powell, it's become more obvious that he's not referencing the transitory thinking about inflation.
Speaker: So in other words, is he too starting to sound or think a little more on the hawkish side?
Speaker: And of course, a lot of the talk around interest rates and inflation is fueling a wider conversation about stagflation.
Speaker: What do you make of that and how could it impact FX markets?
Speaker: Indeed, is a very popular narrative.
Speaker: I think it's a little bit misunderstood because it's not the same type of stagflation which existed back in the mid 70s.
Speaker: Nonetheless, there certainly is a whiff of it.
Speaker: I mean, global growth has been cooling and obviously inflationary pressures have proven to be stickier.
Speaker: Lately, this might have impacted the dollar's behavior, just taking away some of its sensitivity to cyclical forces.
Speaker: But overall, if stagflation fears or concerns were to become a lot more heightened than what we've seen already, we could see a situation where the dollar begins to revert back to more of its risk-off characteristics.
Speaker: That is, it tends to benefit strongly when you have heightened risk aversion.
Speaker: We're not there yet, but we need to be on watch should these concerns materialize.
Speaker: Let's finish up with the pound.
Speaker: You and the team have a counter consensus view on sterling, don't you?
Speaker: Yes, we sure have.
Speaker: I mean, my colleague Dominic Bunning has been looking at this for quite some time and he's been arguing that the outlook for the British pound would underwhelm.
Speaker: It should certainly held up better earlier this year, but we still believe that the direction of travel is for this currency to be weakening modestly in the months and quarters to come.
Speaker: One source of debate for the British pound is whether it's a cheap currency or not.
Speaker: If you take a bigger picture perspective, many argue that relative to the past, Sterling is indeed very, very undervalued.
Speaker: We think, again, that's a little misleading because it looks past what could be quite an interesting or a structural break to what happened in the post-Brexit world.
Speaker: If anything, perhaps Sterling's valuation is very fair and not cheap at all.
Speaker: Paul, thanks very much for your time.
Speaker: Thank you very much.
Speaker: So that's it for another week.
Speaker: Thank you to Simon Wells, Fred Newman, Joseph in Calcaterra, and Paul Mackle for joining us on the podcast.
Speaker: From all of us here, thanks very much for listening.
Speaker: Please join us next week for another edition of the Macro Viewpoint.
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.
