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.
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Speaker: This podcast was recorded for publication on the 29th of August, 2024 by HSBC Global Research.
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Speaker: Just search for The Macrobrief.
Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to the Macro Brief.
Speaker: Now, as we return from the summer break, investor attention is firmly on the global major central banks.
Speaker: Falling inflation and the recent market volatility has heightened the appetite for rate cuts.
Speaker: But with many challenges on the banks' agendas, how quickly can they deliver?
Speaker: On today's podcast, we're assessing the options facing the Fed, ECB and Bank of England.
Speaker: And to do that, I'm joined from New York by Ryan Wang, US economist.
Speaker: And here in the studio, we have Chris Hare, senior European economist.
Speaker: Ryan and Chris, welcome to the podcast.
Speaker: Great to be here.
Speaker: Thank you, Piers.
Speaker: Thanks, Piers.
Speaker: So in our last podcast, before we took a small summer break, we talked about the reasons behind the big market sell-off that took place at the start of August.
Speaker: It was violent, but short-lived.
Speaker: One of the triggers was seen as US recession fears on the back of weaker than expected labor data.
Speaker: And then everyone seemingly pulled back from the brink and went on holiday and waited for Jackson Hole.
Speaker: So I guess we should explain the significance of Jackson Hole and more to the point why in some years it's significant and in other years it goes by relatively unnoticed.
Speaker: Ryan, do you want to just help us out on that one?
Speaker: Yes, absolutely.
Speaker: So the Jackson Hole Economic Symposium, as its name suggests,
Speaker: is a policy forum hosted every year by the Kansas City Fed.
Speaker: And this year, the topic of the symposium was monetary policy transmission.
Speaker: But also what markets tend to focus on quite a bit is the commentary that we often hear from the chair of the Federal Reserve, Jerome Powell.
Speaker: And this year, again, was no disappointment in that sense, as we got a pretty clear signal from the Fed chair that a rate cut is likely to be delivered at the next policy meeting in September.
Speaker: So I guess my question to you, Ryan, is whether we're set up for disappointment, given how widely established the consensus is that the Fed is going to cut at the next meeting and continue to cut in subsequent meetings?
Speaker: Well, this is a very interesting question.
Speaker: And you mentioned the catalyst, which has been a lot of attention on what's happening in labor markets in the United States.
Speaker: And so, you know, a lot of the recent market angst indeed was kicked off by the July labor market report in the United States, which should have further rise in the unemployment rate
Speaker: from 4.1% all the way up to 4.3%.
Speaker: And I think what has partly allayed some of the market fears in recent weeks has been more subdued readings from initial jobless claims, which we get every week.
Speaker: And because we've seen a little bit of a retracement in those numbers, that has reinforced the notion that we don't actually have an elevated rate of layoffs in the United States.
Speaker: Actually, Chair Powell at the Jackson Hole Symposium made this quite clear, saying that we don't see elevated layoffs, but we do see a less frantic pace of hiring.
Speaker: And so it's this nuance, which I think is important and may convince FOMC policymakers to begin with a more incremental rate cut in September of 25 basis points, according to our forecast.
Speaker: Now, we do expect an additional 50 basis points of rate cuts delivered in 25 base points steps at the subsequent meetings in November and December.
Speaker: And so that would overall mean 75 base points of rate reduction this year, followed by an additional 75 base points of rate cuts in 2025.
Speaker: And can we say that the inflation genie is firmly back in the bottle or are they risks on that front?
Speaker: Well, I think there's always risks on both sides.
Speaker: What we can say is that core inflation has fallen below the 3 percent level in the United States.
Speaker: And I think over the remainder of this year, we could be bouncing around somewhere between two and a half and 3 percent.
Speaker: So I wouldn't say that inflation is firmly back to what the Fed is looking for with, of course, its 2 percent inflation target.
Speaker: But I think the labor market signals actually change.
Speaker: have a double implication.
Speaker: They form one half of the Fed's dual mandate, and so the Fed is directly focused on the unemployment rate and the pace of job creation.
Speaker: But also, the gradual softening of labor market conditions also, I think, reduces the future upside risks to inflation.
Speaker: And that's probably another reason why the Fed is now looking at these risks as more fully balanced.
Speaker: And so therefore, the move at least towards incremental rate cuts is likely upon us.
Speaker: So good news, hopefully, on the interest rate front out of the US.
Speaker: Turning to Europe, Chris, you've just published the latest edition of the Europe Macro Tracker.
Speaker: We had all the focus in Europe on the French parliamentary elections end of June, beginning of July.
Speaker: But since then, on the macro front, it's been relatively quiet and the focus has been firmly on the US.
Speaker: I guess also where we're going with AI.
Speaker: Now that we've had the Nvidia results, which were eagerly anticipated, could the focus move to Europe?
Speaker: Are we any closer to a government being formed in France?
Speaker: Update us.
Speaker: Well, potentially.
Speaker: August tends to be quiet in Europe.
Speaker: This year was really no exception.
Speaker: But we do have upcoming policy meetings from the point of view of the European Central Bank and the Bank of England.
Speaker: The ECB's meeting is going to be on the 12th of September.
Speaker: And it's going to be an interesting one.
Speaker: We're expecting a rate cut.
Speaker: Markets are expecting a rate cut.
Speaker: And the Governing Council itself has said that essentially now is a good time to re-evaluate the degree of policy restrictiveness.
Speaker: But there is still a lingering concern about the stickiness of inflation in Europe, particularly services inflation.
Speaker: It's not a complete done deal, but it is a rate cut that we're expecting.
Speaker: But I think we'll be looking out for guidance from Governing Council members over the coming days there.
Speaker: From the Bank of England, well, Andrew Bailey gave a speech at Jackson Hole, but it was very finely balanced to use the Bank of England's wording.
Speaker: We don't think that there's going to be a rate cut at the next Bank of England meeting on the 19th of September.
Speaker: You know, we think there is this pretty cautious stance from the point of view of the Bank of England.
Speaker: Any upcoming decision is going to be pretty close from our perspective.
Speaker: We don't think the next rate cut is going to be until November.
Speaker: But again, we'll be looking from that guidance from policymakers over the coming days.
Speaker: And in French politics, well, the parliament is still deadlocked.
Speaker: We are now at the longest ever French caretaker government.
Speaker: It's lasted now for over 40 days without a new prime minister being put into place.
Speaker: But one thing I would point out as a bit of perspective is that this caretaker government isn't as long as caretaker governments we've seen recently in Germany.
Speaker: And it's not a patch on Belgium, for example.
Speaker: So we can see these sorts of things in Europe and they do tend to get resolved at least eventually.
Speaker: What was the record in Belgium?
Speaker: Can you remember?
Speaker: 560 odd days, I think.
Speaker: So not too far shy of two years without a government.
Speaker: So they've got a ways to go before they beat that record.
Speaker: That's right.
Speaker: You highlighted in the tracker that the recent depreciation in the euro and the British pound could have an impact on inflation.
Speaker: Can you expand on that?
Speaker: Well, potentially, it's an interesting story because the Federal Reserve is getting more dovish.
Speaker: That's led to some dollar weakness.
Speaker: And the flip side of that is some appreciation in the euro and actually a bit more of a depreciation in the pound.
Speaker: Now, central bankers have been very focused on domestic inflation pressures for a long time.
Speaker: But this currency appreciation might actually start dragging down on imported inflation a little bit.
Speaker: So that's something that might start percolating in terms of policymakers thinking over the coming months.
Speaker: We don't think it's yet a kind of first order monetary policy issue, but it's, I think, something that's worth bearing in mind in a way that hasn't been over the last few months.
Speaker: All in all, I would say, just as the man in the street, that the outlook is not that bad.
Speaker: So why is household confidence struggling to recover?
Speaker: Sort of depends on where you are in Europe.
Speaker: So we've been pretty pessimistic on Germany, for example, for a while.
Speaker: And the Q2 GDP data were perhaps an illustration of why that's the case.
Speaker: Household spending fell.
Speaker: So I think we're in a situation where households have observed big price rises and are pretty low on confidence as a result of that.
Speaker: Households in Europe, we think, are also saving because interest rates are high and the returns on savings are higher.
Speaker: And what we'd want to see in Germany, but also in a lot of other European economies too, is for a bit more confidence, perhaps the start of further rate decreases might start discouraging savings, pushing household spending a little bit higher.
Speaker: And I think that's something that we'd like to see to believe in a more sustained economic recovery throughout Europe.
Speaker: Another thing that may have gone on notice in the UK and your colleagues wrote about it is that in mid-August there was a dovish shift in the composition of the Monetary Policy Committee.
Speaker: What was that all about?
Speaker: Potentially a slight dovish shift.
Speaker: So MPC member Jonathan Haskell has now left the committee and he's a pretty well-known hawk.
Speaker: He opposed the most recent rate cut, for example, and this was a pretty finely balanced vote.
Speaker: It was a 5-4 decision.
Speaker: Now he's being replaced by Alan Taylor and to be fair we don't know really much about where he stands on the Dove-Hawk spectrum but to the extent that you're replacing very much a hawk on the committee maybe it might lead to a very slight shift on the committee and this personnel composition on the committee is quite important particularly if we're going to continue to see split votes over the next few months.
Speaker: And I guess the one to look out for from a fiscal perspective is the autumn budget at the end of October.
Speaker: Any thoughts on that?
Speaker: Yeah, Prime Minister Keir Starmer gave a pretty gloomy speech this week talking about a fiscal black hole, a very challenging economic inheritance.
Speaker: He and Chancellor Rachel Reeves have been flagging the possibility of tax increases.
Speaker: If they can't come through income tax, they may be through things like capital gains or inheritance tax changes or changes to taxes on pensions.
Speaker: And all those kind of things are trying to meet existing fiscal rules, which Labour is signing up for.
Speaker: So potentially for the UK economy as a whole, it's a fiscal statement that might make quite challenging reading, I think, when we come to the end of October.
Speaker: That's all we've got time for today.
Speaker: Ryan and Chris, thank you very much for bringing us back up to date as we go back to school.
Speaker: I'm sure we'll have you back on the podcast to comment on developments.
Speaker: So for now, thank you very much.
Speaker: Pleasure.
Speaker: Thanks so much, Piers.
Speaker: And now here's a few recent reports from the global research team that you might have missed.
Speaker: Our second Funding the Future survey, which offers a window into the world of venture capital, shows that investors have cut back expectations of increased VC activity in the coming three months.
Speaker: However, optimism for a pickup over a 12-month horizon remains, with investors anticipating a more favorable interest rate environment.
Speaker: The report, led by data scientist Shiva Jun, also examines activity in two important sectors for private and listed equity investors alike, tech and healthcare.
Speaker: As the energy transition gathers pace, demand for critical minerals like lithium, cobalt, nickel, and others you might not even have heard of, is set to surge.
Speaker: Shanela Rajanagam, trade economist, and James Pomeroy, global economist, have investigated the potential implications for trade flows and trade policy and looked at who the winners might be as these shifts play out.
Speaker: And our ESG summer series of reports has continued, where the team look at sustainability in less obvious places.
Speaker: The latest report examines the effect of space debris as well as the impact of extreme weather on the aviation industry.
Speaker: If you'd like more details on anything that we've talked about today, please email askresearch at hsbc.com.
Speaker: And don't forget that if you're a client of HSBC Global Research, you can download our mobile app.
Speaker: So that's all from us today.
Speaker: Please join us next week for another edition of the Macrobrief.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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