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: And now onto today's show.
Speaker: This podcast was recorded for publication on the 6th of June, 2024 by HSPC Global Research.
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Speaker: Just search for The Macro Brief.
Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm your host, Piers Butler.
Speaker: Today we're focusing on the diverging policies of two of the global major central banks.
Speaker: Rewind to the beginning of the year and markets were pricing in around 150 basis points of cuts by both the ECB and the Fed.
Speaker: Yet here we are halfway through the year and only now have we seen the beginning of the easing cycle, with the ECB's 25 basis points reduction, the first time in history that it has moved before the Fed.
Speaker: In a moment, we'll get the story from the US.
Speaker: But first, let's begin here in London, where I'm joined by our senior European economist, Fabio Balboni.
Speaker: Fabio, welcome to the podcast.
Speaker: Thank you very much.
Speaker: So this was well telegraphed.
Speaker: There were no surprises about the rate cut.
Speaker: But in fact, there was a surprise.
Speaker: What was it?
Speaker: No, absolutely.
Speaker: I mean, had the ECB not told us that they were going to cut rates, maybe we'll be here celebrating the first rate cut in five years.
Speaker: But actually, the surprise on the day would rather be of the opposite direction.
Speaker: So this did not feel like a central bank that was confident about cutting rates.
Speaker: And indeed, the change that they did to the statement
Speaker: dropping the easing bias for the future, so basically the ACB no longer says that their intention is to reduce further the level of policy restriction, suggested that there is no certainty about possible future rate cuts.
Speaker: And even when she was asked about it during the press conference, President Christine Lagarde was very cautious in terms of pre-committing possible future cuts.
Speaker: Why the caution?
Speaker: I mean, if you look at the data revisions,
Speaker: They're not that dramatic.
Speaker: Absolutely.
Speaker: The data revisions are not big.
Speaker: They are pretty much in line with what we were expecting.
Speaker: But actually, at the margin, inflation is a little bit higher than what we had anticipated.
Speaker: And particularly, one data point is important, I think, which is 2025.
Speaker: Inflation was revised up 0.2% from 2.0 to 2.2 now.
Speaker: That might seem little, but the ECB had previously aimed at hitting its inflation target, which is 2%, by the mid of 2025.
Speaker: And based on a new forecast, it no longer does.
Speaker: And what's also important is that, again, even though the revisions were smaller, inflation is now seen as staying
Speaker: well above 2% for a longer period of time.
Speaker: And that, of course, also increases the risk of possible second round effect on wages.
Speaker: So we think that that could be an element that might have kind of changed a little bit or undermined that strong consensus that existed previously towards cutting rates in the future and might have therefore pushed the ECB to edge on the side of caution and become truly data dependent.
Speaker: I don't envy your job at the moment because yesterday we had data out of the US that sort of led to people feeling more bullish about rates coming down.
Speaker: And then today we have a statement by the ECB that kind of is more hawkish.
Speaker: I mean, how do we deal in that environment?
Speaker: Where do we go from here?
Speaker: Well, I mean, absolutely.
Speaker: We've seen a lot of market moves recently, as you were hinting before.
Speaker: And of course, you know, the downside of being completely data dependent is that every time there is a new data release and we might have upside surprises, downside surprises, and of course, you know, the market reaction,
Speaker: could be exacerbated by the lack of any possible future guidance or rates.
Speaker: And particularly when you think about a central bank like the ECB, where there's many different voices among the hawks and doves, there is a chance that over the summer we could get more volatility in the market as new data comes along or indeed as we get...
Speaker: some news from the US and maybe there's a change of course of monetary policy in the Fed.
Speaker: So certainly I think we can expect more volatility.
Speaker: The good news I would say is that in all of that, of course, the fact that central banks and the ECB do not feel a strong urgency to cut rates
Speaker: Certainly it's because of resilience on inflation, but it's also because the data on growth remain fairly comfortable.
Speaker: And as such, the ECB feels that they can afford maybe to wait a little bit longer to have more certainty about inflation being on the right track before the cut rates further.
Speaker: So just to conclude, I mean, we seem to be now in a position where the ECB, like the Fed, are essentially driven by the data.
Speaker: Well, absolutely.
Speaker: I mean, they are very data driven.
Speaker: Having said that, they've already pretty much told us that July is unlikely to be a live meeting.
Speaker: Christine Lagarde concluded today's meeting by saying, have a good summer.
Speaker: So that seems to end to an unlikelihood of a decision in July.
Speaker: So our central case does remain that the ACB will cut rates again in September.
Speaker: So when they come back from the summer break.
Speaker: But of course, I would say that after today, the risks of the ECB being on hold in September have maybe increased a little bit at the margin.
Speaker: Fabio, thank you very much for joining us today.
Speaker: Thank you.
Speaker: So the Raycasts have started in Europe.
Speaker: Let's cross to the other side of the Atlantic, where Aline van Duyn, our global managing editor, is with our US economist Ryan Wang.
Speaker: So Aline, the Fed are due to meet next week.
Speaker: That's right, Piers.
Speaker: So Ryan, what is the Fed outlook?
Speaker: Well, FOMC policymakers have been pretty clear recently with their forward guidance.
Speaker: Generally, the FOMC is saying that they need to achieve greater confidence on inflation, really that inflation is getting closer to the Fed's 2 percent target to be able to reach a decision on cutting the policy rate.
Speaker: And at the same time, broadly since the beginning of the year, the inflation data have not given the Fed any greater confidence.
Speaker: So I think really there's two main reasons why the Fed still hasn't made a decision or doesn't seem to be getting close to a decision on cutting rates.
Speaker: One relates to that higher-than-expected inflation since the beginning of this year, and a second reason relates to resilient economic growth.
Speaker: Now, admittedly, the economic data in the U.S. on the growth side and on labor market activity have been a little bit more mixed recently.
Speaker: I think we can say that economic growth, GDP growth in 2024 is likely to be slower than it was last year.
Speaker: But at the same time, the rates of growth and the rates of job creation are still
Speaker: stronger than what you might consider typical in, for example, an outright recession.
Speaker: So because economic growth is broadly still staying resilient, that's another reason for the Fed to essentially delay consideration of rate cuts.
Speaker: MS.
Speaker: If and when the Fed does deliver the first rate cut, would that be the start of a traditional cutting cycle?
Speaker: Well, this is a very interesting question.
Speaker: If you look at some of the central banks that have begun to reduce policy rates, the European Central Bank, the Bank of Canada, both have essentially indicated that a meeting-by-meeting approach is likely going forward.
Speaker: And if and when the Fed does reach that decision to cut rates for the first time, we, for example, forecast that in September.
Speaker: I think it's very likely the policymakers would adopt a similar type of rhetoric.
Speaker: Now, I think really the answer to your question is this.
Speaker: What's the reason for the rate cuts in the first place?
Speaker: And it has to do with this combination of incoming data on inflation and economic activity.
Speaker: We, for example, think that the Fed is waiting for core inflation to reach around 2.5 percent, still a little bit higher than the Fed's 2 percent target, but much lower than we've been in recent years as a potential trigger, really, for potentially delivering that first rate cut.
Speaker: But in this scenario, if economic activity is still staying quite resilient, I think we could expect those rate cuts to be slow and quite gradual.
Speaker: On the other hand, if growth does weaken more significantly than is in our forecast or the Fed's forecast, that's really the type of environment where you might expect a more traditional sequence of rate cuts, where the Fed really is trying to reduce policy rates to put a floor under any economic slowdown.
Speaker: And Ryan, just remind us what your forecasts are for Fed cuts ahead.
Speaker: Yes.
Speaker: So we're only expecting a single 25 base point rate cut this year to be delivered at the September policy meeting, and that partly reflects our views on inflation and that core inflation could remain relatively sticky for the rest of this year.
Speaker: But we continue to expect 75 base points of rate cuts in 2025.
Speaker: Thank you so much.
Speaker: Thanks, Elaine.
Speaker: It's been a huge week of elections in emerging markets, and the polls in India, Mexico, and South Africa threw up some surprise results.
Speaker: In South Africa, the ANC won 40% of the vote, but lost its parliamentary majority for the first time since democratic elections began, meaning the country looks set for an unprecedented coalition government.
Speaker: In Mexico, left-leaning candidate Claudio Schaumbam became the first woman to be elected president, and also one with the largest margin in history.
Speaker: And in an unexpected result, her party is also set to dominate Congress, which could have significant implications for the reform agenda.
Speaker: And in India, the Narendra Modi-led coalition won a majority, although the scale of the victory was much narrower than expected.
Speaker: If you'd like to hear more about the economic implications of that election, then please check out the latest edition of our sister podcast, Under the Banyan Tree, which features reaction from economist Pranjal Bhandari.
Speaker: And before we go, a quick reminder that our next Live Insights event is not far away.
Speaker: On the 19th of June, James Pomeroy, global economist, will be looking at how the world has evolved since the pandemic and the role played by key themes such as automation, demographics, and the energy transition.
Speaker: To register for that event or for more information on anything we've discussed on today's podcast, please email askresearch at hspc.com.
Speaker: So that's all we've got time for today.
Speaker: Thanks very much for listening to The Macrobrief.
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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