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 look ahead to a big week for central bank meetings across the globe.
Speaker: We find out how the more hawkish Fed outlook has affected our view on US Treasuries.
Speaker: We introduce a new indicator which tracks the degree of hawkishness or dovishness from ECB speakers.
Speaker: And we assess how fears over the Omicron variant is affecting the global economic recovery.
Speaker: This podcast was recorded on Thursday, the 9th of December 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: There's a very big week for central bank meetings coming up, not just the Federal Reserve, ECB and Bank of England, but other G10 central banks and banks in emerging markets.
Speaker: There could be key decisions on asset purchases and interest rates.
Speaker: Janet Henry, Global Chief Economist, is here to preview things for us.
Speaker: So, Janet, central banks are clearly in a very difficult position at the moment.
Speaker: On the one hand, we've got rising inflation, which would normally mean higher interest rates.
Speaker: On the other hand, we've got this massive uncertainty around the spread of Omicron, high COVID cases in general.
Speaker: How do you see things?
Speaker: I see things as being very challenging.
Speaker: Obviously, what we've seen around the world from central banks in recent months is that a lot of the emerging economies have already been raising rates aggressively, particularly in Latin America,
Speaker: and parts of Central and Eastern Europe.
Speaker: But for the G10 central banks, it has been a little bit more mixed.
Speaker: And now the Federal Reserve is facing a surge in inflation, but is still not quite there on what it wants to see on the labour market.
Speaker: And even the ECB has been surprised as inflation appears set to nudge 5% or so in the eurozone as well.
Speaker: But we have this ongoing uncertainty regarding Omicron and governments are responding differently.
Speaker: In some countries, we are seeing renewed restrictions, but in others, we're seeing a continued reopening of the economy and we may not actually see the downside risks on activity.
Speaker: We may just see further bottlenecks continuing to push up inflation.
Speaker: So as you suggested there, Janet, the two key meetings next week of the Fed and the ECB, what are the markets expecting?
Speaker: Well, the markets, I think, now do expect the Federal Reserve to accelerate the taper of its asset purchases, so double the rate at which it's lowering its asset purchases so that it completes them by about March.
Speaker: And for the ECB, they are fully expected to halt the
Speaker: their pandemic programme, the PEP programme by the end of March.
Speaker: And the markets will be looking out for what they say regarding other asset purchases beyond March under the existing asset programme.
Speaker: We do have other G10 central banks also meeting next week, particularly the Bank of England and Norway.
Speaker: Again, what are investors looking for there?
Speaker: I think investors know that these are both very finely balanced decisions.
Speaker: But remember, Norway has already been gradually raising interest rates.
Speaker: So probably are more inclined to be open to the possibility that Norway does proceed, irrespective of the Omicron uncertainty.
Speaker: And the market had previously fully expected that the Bank of England would raise rates in December, particularly given the stronger than expected inflation and labour market data.
Speaker: But over the last couple of weeks of renewed uncertainty, they won't be as surprised if once again the Bank of England does stay on hold and waits until February.
Speaker: And finally, Janet, which emerging market central banks are meeting next week?
Speaker: A whole array of emerging market central banks are meeting next week, Chris.
Speaker: And I think the markets will be mainly focusing on whether the aggressive moves continue in parts of Latin America, as have been coming through in the likes of Chile and Colombia, and whether the gradual approach in Mexico, given that they face even bigger challenges because growth is already slowing and they know that the Fed will be raising rates next year, whether they continue with their 25 basis point moves on interest rate increases.
Speaker: As you've just highlighted, Janet, it's a very busy week indeed.
Speaker: Thank you very much for that summary.
Speaker: Thank you, Chris.
Speaker: That view on US monetary policy that Janet has just talked about has implications for our outlook on US Treasuries.
Speaker: Let's speak to Steve Major, Global Head of Fixed Income Research.
Speaker: Steve, welcome to the podcast.
Speaker: Thank you, Piers.
Speaker: So the Fed's had a hawkish turn, and that has put a flaw under yields.
Speaker: How has that changed your outlook in the near term?
Speaker: Well, the floor for yields is being put in place by the expectation of monetary tightening.
Speaker: Whether or not that transpires, we'll have to wait and see.
Speaker: But it means that we have to be pragmatic in terms of our view on the bond market.
Speaker: So the profile for yields, as far as we're concerned, hasn't really changed.
Speaker: It's really more one of timing because of the Fed's move to a more hawkish stance.
Speaker: But your central premise for lower for longer remains.
Speaker: Can you explain to us why?
Speaker: The central premise or hypothesis is that each cycle for interest rates peaks at a lower level than the previous one.
Speaker: That has been the trend for decades.
Speaker: Now, of course, the trend could change, but you'd need to have something pretty robust and convincing to believe the trend is going to start reversing.
Speaker: We think it's unlikely that when the big central banks start their hiking cycles, if and when they start them, that they're going to get anywhere near the level that they reached in the previous cycle.
Speaker: For the Fed, that's two and a half, by the way.
Speaker: In your latest major bond letter, you make the point that generally speaking, one tends to look at the US relative to the UK in terms of getting signals.
Speaker: But you think at the moment we should actually be paying attention to what the UK is telling us?
Speaker: Can you explain that?
Speaker: Yeah, it's always the case that we can get a read across from other markets.
Speaker: So I think recently the UK could have been quite informative.
Speaker: In the recent past, Australia and New Zealand, China is very important.
Speaker: But with the UK, the Bank of England has been quite explicit about its exit principles from the QE.
Speaker: They've stated levels.
Speaker: So if the bank rate gets to 50 basis points,
Speaker: It's currently 10 basis points.
Speaker: If it gets there, they'll do QT.
Speaker: So they'll shrink the balance sheet.
Speaker: If it gets to 1%, they'll sell guilts.
Speaker: So that's giving us an indication from a fairly large, medium-sized, at least, central bank about what their view of the world is.
Speaker: So how different can the US really be?
Speaker: It seems that the Bank of England is being a bit more candid in the outlook.
Speaker: Steve, thank you very much.
Speaker: Thank you, Piers.
Speaker: Let's turn to the currency markets now where our FX and data science teams have joined up to create a new indicator, which tracks the degree of hawkishness or dovishness from ECB speakers.
Speaker: Mark McDonald is our head of data science and analytics, and he joins us now.
Speaker: So Mark, can you tell us more about this indicator?
Speaker: Yes, of course.
Speaker: We've created the ECB DOE indicator, where DOE stands for dove or hawk.
Speaker: And this indicator is really based on the outputs of a machine learning model, which we built and trained, which takes individual sentences from ECB speeches and tries to allocate them to one of three classes.
Speaker: Was it hawkish?
Speaker: Was it dovish?
Speaker: Or was it neutral?
Speaker: And it's from this very granular information that we calculate the resulting indicator, which looks back over a six month window and says, you know, over that window, have ECB and speakers been more hawkish or more dovish?
Speaker: So what does this DOE indicator show right now?
Speaker: Well, we can see that the DOE indicator has moved up quite sharply over the past six months, and that suggests that ECB speakers have become, on average, more hawkish than they were six months ago.
Speaker: Although really, if we're being more accurate, I would say they've become less DOE-ish.
Speaker: Six months ago, a window from six months ago to six months before that,
Speaker: included some periods where things looked pretty downbeat and there was some quite dovish terminology on speeches.
Speaker: That's fallen out of the back of the window now, but the indicator is still in negative territory, suggesting that on average, ECB speakers have been a little bit dovish, just a lot less so than they had been previously.
Speaker: We can see this quite clearly as well when we look more granularly at the scores for individual speeches by individual speakers.
Speaker: We can see that these individual speech dough scores have tended to shift towards the right as well, suggesting it's been a pretty broad based move towards a less dovish tone.
Speaker: And how does this analysis fit into the view of our FX strategy team on the euro?
Speaker: Well, the FX strategy team still see further downside for euro dollar.
Speaker: The ECB moving to a less dovish stance is obviously supportive of the euro in isolation, but it's not in isolation.
Speaker: The ECB are not moving by themselves.
Speaker: The Fed have also become notably less dovish in recent months.
Speaker: And so it really needs to be considered on a relative basis.
Speaker: So tracking the DOE indicator on an ongoing basis will be something that the FX strategy team will be keeping an eye on.
Speaker: But at the moment, their view for the euro is really based on kind of cyclical drivers.
Speaker: Mark, thanks very much for explaining all that to us.
Speaker: Thanks very much.
Speaker: As we have heard, the new Omicron variant has brought the pandemic back into focus.
Speaker: Cases are rising in Europe in particular, leading some countries to bring in tighter restrictions.
Speaker: So what are the latest data telling us about the economic picture?
Speaker: James Pomeroy, global economist, is here to explain.
Speaker: James, have these rising case numbers affected consumer confidence?
Speaker: There's some evidence that it is, both in terms of some of the mobility data.
Speaker: Clearly, where lockdowns have come into place, this is affecting what people are able to do.
Speaker: But also, there's a sense that consumer caution could come back into play a little bit more broadly.
Speaker: We've seen this throughout the pandemic.
Speaker: where even when you don't have restrictions in place consumers opting to err on the side of caution and we see a slowdown in some of those numbers and that's pretty evident in some of the mobility data but also the official consumer confidence surveys in the eurozone in particular have sagged a little bit in the last month or so in a similar vein to what we saw in the us over the summer where you saw the surging cases there
Speaker: And are there any signs that inflation is peaking?
Speaker: Well, there is and there isn't.
Speaker: So the headline inflation rates are likely to stay high and they're likely to move higher in some parts of the world in the course of the next couple of months because of some of these base effects and some of the things that have already happened, essentially, in terms of energy prices, used car prices and some of these sort of big factors that have been driving inflation.
Speaker: But in terms of the underlying momentum and some of these big ticket items in terms of shipping costs, in terms of input costs for businesses, in terms of these energy prices, they all look like they have peaked out.
Speaker: So there's a good chance that you won't see the impact of this on those headline inflation rates.
Speaker: for quite some time.
Speaker: But if you do start to see these bottlenecks easing and these cost pressures alleviating, that could mean that inflation rates in the second half of next year are considerably lower than people may be currently expecting, but also much lower than they are today.
Speaker: You mentioned higher costs there.
Speaker: How are companies going to respond to these?
Speaker: This is one of the big questions, I guess, in terms of that inflation outlook for next year is how much of these higher costs that businesses are facing today get passed on in the course of 2022.
Speaker: Now, I spoke just a minute ago about the sort of downside risks to inflation, but the upside risks are quite clearly that firms feel like they can pass on some of these cost increases or they have to because otherwise,
Speaker: they risk going out of business.
Speaker: So that's clearly an upside risk to inflation that firms start to pass a lot more of that on.
Speaker: And that's something we're going to have to keep an eye on in the first half of 2022, because how much of that does feed through will clearly have a huge impact on that speed of the drop on that inflation rate in the second half of the year and clearly what central banks opt to do about it.
Speaker: Finally, how is the broader global economic backdrop looking?
Speaker: Well, until we got the Omicron variant, things were looking generally quite good.
Speaker: The global PMIs were pretty strong.
Speaker: We've had a resurgence in activity in Asia as well as restrictions have come off.
Speaker: You've seen this really clearly in the PMI data and some of the high frequency data too.
Speaker: They've been improving.
Speaker: So clearly things were in a relatively good place.
Speaker: But now there's this huge uncertainty hanging over the global economy as we go into the end of the year.
Speaker: And until we get that clarity, it's quite likely that we see some softness in those numbers in the course of the next month or so.
Speaker: We would expect a dip in terms of survey data and in terms of mobility data over the course of the coming weeks across the world.
Speaker: and there's something that I think investors are going to have to keep an eye out for.
Speaker: But if you go into 2022, if we do get some better news on this new variant, then the global economy is in relatively good shape and that pace of growth is relatively fast by historical standards.
Speaker: It's just maybe not quite as quick as we saw earlier this year.
Speaker: James, thanks very much.
Speaker: Thanks very much.
Speaker: So that's all from us today.
Speaker: Thanks to our guests, Janet Henry, Steve Major, Mark McDonald, and James Pomeroy.
Speaker: From all of us here, thanks 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.
