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, and now onto today's show.
Speaker: You're listening to The Macro Viewpoint, our weekly focus on the views of the HSBC Global Research Team.
Speaker: This podcast was recorded on Thursday 2nd February 2023.
Speaker: Our full disclosures and disclaimers must be viewed in the link attached to this podcast.
Speaker: Hello and welcome everybody.
Speaker: I'm Aline van Duyn in New York.
Speaker: And I'm P.S.
Speaker: Butler in London.
Speaker: This week, a special focus for you on 24 hours of central bank policy decisions on both sides of the Atlantic.
Speaker: We'll be looking at the Fed, the ECB and the Bank of England.
Speaker: And after yet another round of interest rate increases, we'll be asking just how close are we to the end of this aggressive tightening cycle?
Speaker: And has the battle been won against the spiraling price inflation that touched it all off a year ago?
Speaker: Yes, the Federal Reserve did raise rates on Wednesday, despite signs of slowing inflation and weaker than expected economic data recently.
Speaker: To talk through the details, I'm joined here in New York by our US economist, Ryan Wang.
Speaker: So Ryan, the first FOMC decision of the year.
Speaker: Tell us what happened.
Speaker: Hi, Eileen.
Speaker: Well, the Fed raised the federal funds rate by 25 basis points.
Speaker: That was largely anticipated.
Speaker: And there were a few changes in the FOMC's policy statement.
Speaker: Specifically, the Fed is now saying that the extent of future rate hikes will depend on incoming economic data and also taking into account
Speaker: monetary policy lags, and overall financial market developments as well.
Speaker: And that was a little bit of a change from before when the Fed was saying that the pace of rate hikes would depend on all these variables.
Speaker: So what that essentially signals is that the Fed thinks it's getting a little bit closer to the ultimate destination for the federal funds rate that will be sufficiently restrictive, high enough to help bring inflation back down to 2%.
Speaker: So that was a statement, but markets were really focused on what Chair Powell was going to say and what his tone was going to be.
Speaker: So what were the revelations there?
Speaker: That's right.
Speaker: Markets were really focused on whether Fed Chair Powell would double down on the hawkish message that was really delivered right through the end of last year, including at the previous press conference in December.
Speaker: Well, in the event, we learned that Fedger Powell's views on policy rates may not actually have changed that much since December.
Speaker: He noted that there's been some signs of disinflationary pressures coming through, particularly on the good side, and also maybe some housing services disinflation in the pipeline.
Speaker: But at the same time,
Speaker: Chair Powell emphasized that the risks of elevated inflation can remain very troublesome and difficult to deal with if the Fed were to lose its resolve in terms of maintaining a restrictive stance for monetary policy.
Speaker: So,
Speaker: We got a balance message.
Speaker: And then at one point, Fed Chair Powell said that maybe a couple more rate hikes might be in store.
Speaker: And that probably would mean 25 base point rate hikes at the March and May FOMC meetings.
Speaker: And that's in line with what the Fed signaled in its projections back in December.
Speaker: So this means there is a bit of a gap between what the Fed is indicating and what the market's pricing in and indeed what you're forecasting.
Speaker: That's right.
Speaker: The latest guides and signals from the Fed pose a little bit of an upside risk to our own forecast for policy rates because we're only anticipating one more 25 basis point rate hike to come at the March FOMC meeting.
Speaker: Now, a key reason for our expectation is that we actually expect a significant slowdown in job gains down close to zero to come this spring.
Speaker: And the recent data have shown that jobs growth stayed strong right through the end of last year with payroll employment growth averaging about $250,000 per month.
Speaker: So in the next few months, it'll be important to see whether the employment slowdown that we forecast actually unfolds.
Speaker: That timing will have an important bearing on the course of a monetary policy and could end up determining whether the Fed actually pauses on rate hikes a little bit sooner than it's currently guiding.
Speaker: Ryan, really interesting.
Speaker: Thank you.
Speaker: And looking forward to the next update.
Speaker: Thanks a lot, Aline.
Speaker: There was some good news this week for the Eurozone, with the latest data suggesting that it looks less likely that it will enter a recession.
Speaker: Here in the UK, things remain tough, with stagnating growth and problematically high inflation.
Speaker: A lot to digest from the ECB and the Bank of England after their meetings today.
Speaker: I'm joined by Simon Wells, our Chief European Economist.
Speaker: Simon, welcome.
Speaker: Hi.
Speaker: So, busy day for you.
Speaker: So, firstly, let's talk about the BOE.
Speaker: It ended up being a bit more hawkish than we had expected.
Speaker: It was a bit more hawkish than we'd expected.
Speaker: In the end, they hiked 50 basis points, which is what the market and most economists were expecting.
Speaker: We'd thought, given a decidedly sub-target inflation forecast, a bit of weaker demand data that they might have slowed for 25.
Speaker: But in the end, they didn't.
Speaker: They went 50.
Speaker: UK bank rate is now 4%.
Speaker: And this is one of the most abrupt tightening cycles that we've had in about 40 years.
Speaker: So when I look at their forecasts, which they've changed quite a lot, I'm finding it a little bit difficult to reconcile those changes with their rate decision.
Speaker: You wouldn't be alone there.
Speaker: I think you're not the only person struggling with that reconciliation.
Speaker: I think the way to think about it is the broad forecast sort of frames their thinking.
Speaker: But at the moment, a majority of the committee are very focused on the upside risks to inflation and heading those off.
Speaker: And even if that means tightening such that the main forecast is predicting sub-target inflation in two or three years' time, that is where the majority of their head is at at the moment.
Speaker: It's a communication challenge, even by their own admission, but that's the way to think about it.
Speaker: So where does that leave your outlook?
Speaker: Well, because they were a bit more hawkish than we expected with a 7-2 vote and 7 voting for 50 basis points, we've put in an additional 25 basis points for March.
Speaker: I have to say this is a very close call.
Speaker: We thought they'd be done after today, but they're very data dependent now.
Speaker: They're going to be looking at the labour market quantities, core inflation, and on balance they're probably not going to be surprised much to the downside over the next six weeks now.
Speaker: So given that risk-based approach to policy, maybe we'll see one more 25 basis point hike and then they're done.
Speaker: And turning to the ECB, that was more in line with expectations, but the press conference was a bit of a roller coaster?
Speaker: Yes, it was.
Speaker: So ECB did exactly what was expected, what we expected, what the market expected, plus 50 basis points.
Speaker: So we've now had 300 basis points of tightening since last July.
Speaker: But the press conference was interesting because the ECB has said that no longer does forward guidance.
Speaker: It's very much data dependent.
Speaker: And yet Christine Lagarde pretty much promised another 50 basis point move in March.
Speaker: I mean, in some sense, that's not a shock.
Speaker: We were expecting it.
Speaker: The market was largely pricing in.
Speaker: But then she said we may have even more to do after that.
Speaker: We may continue hiking in 50 basis point clips.
Speaker: She rode back a little bit and tried to nuance that, but certainly the ECB is trying to send out a very hawkish message.
Speaker: We think they will hike by 50 in March, but then maybe they will be done.
Speaker: They're trying to sound a bit more hawkish than that, but the market does not believe them.
Speaker: So putting it all together...
Speaker: There's central banks being signalling quite a hawkish stance and the markets not believing that stance.
Speaker: Where do we end up with all of that?
Speaker: Well, I think either the markets think that the central banks will ultimately have to follow what they're expecting, a bit of tail wagging the dog or...
Speaker: Perhaps markets just expect that inflation will fall back much more rapidly than the central banks are forecasting.
Speaker: But one way or another, certainly there is a wide and potentially widening gulf between what markets are expecting and central banks are saying.
Speaker: It's going to be very interesting this year seeing how that resolves itself.
Speaker: Simon, thank you very much.
Speaker: Thank you.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Newman.
Speaker: And you can find us under the banyan tree.
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Speaker: Enjoy the rest of your podcast and we'll see you under the banyan tree.
Speaker: And before we go, just a quick update on India, where the world's fifth largest economy announced its budget for the coming fiscal year.
Speaker: Yes, Pranjal Bhandari, our chief India economist, says the central government tried to tread a fine line between fiscal consolidation and growth support.
Speaker: It's aiming to lower the fiscal deficit from 6.4% in the 2023 fiscal year to 5.9% in 2024.
Speaker: At the same time, it's also providing a sizable push in capital expenditure, with the largest outlays made to railways, followed by roads and telecommunications.
Speaker: Pranjal expects GDP growth to slow from 6.8% this year to 5.5% in the 2024 fiscal year, as exports moderate, pent-up demand fades, and fiscal and monetary policy tighten.
Speaker: So that's all this week.
Speaker: Thanks to our guests, Ryan Wang and Simon Wells.
Speaker: From all of us here, 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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