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The Macro Viewpoint - BoE and Fed reaction, COP26 update, robots and jobs
20 Plays4 years ago
We look at how the Bank of England and Federal Reserve are signalling patience over interest rate rises despite high inflation, find out what’s been happening at the COP26 climate summit and look at what faster automation means for jobs. Disclaimer
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Transcript
Introduction to HSBC Global Viewpoint
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Central Bank Meetings and COP26 Preview
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Thank you for listening.
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You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the last week by our team of economists and strategists.
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Coming up today, it's been a big week for central bank meetings.
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We assess the outcomes from the Bank of England and the Fed, with both banks signalling patience over interest rate rises in the face of high inflation.
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We also get the latest from the COP26 climate summit, look at the threats and opportunities from faster automation, and find out about Africa's first digital currency.
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This podcast was recorded on Thursday, the 4th of November 2021.
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Our full disclosures and disclaims can be found in the link attached to the podcast.
Bank of England's Interest Rate Decision
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We begin the podcast here in the UK where all eyes were on the Bank of England's Monetary Policy Committee meeting.
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Going into it, the market had a high conviction that the bank would raise rates.
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As it turned out, it defied those expectations and kept them on hold.
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Liz Martin, senior UK economist, joins me now.
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So Liz, the market was wrong on this, but quite a few economists, yourselves included, were right.
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What happened today?
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Well, I think the market decided that they'd heard some hawkish comments from MPC members and they heard a level of urgency in those comments that we really didn't hear or interpret ourselves.
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But having interpreted the comments in that way, the market then moved to fully price a 15 basis point rate rise for November.
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At times they were pricing even more than that.
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and they assumed that because the Bank of England didn't explicitly tell the market that it had got it wrong, then that essentially confirmed that it had got it right.
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But in fact, what the Bank of England told us today was actually it was a very close call.
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We hadn't made our minds up and it's not really our job to tell the market when it's got it wrong.
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So I think it's quite
Factors Influencing Bank of England's Decision
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interesting, really.
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I think it means that in the future, the market will have a little less conviction in its own views because what the Bank of England said today is,
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Just because we don't push back and tell you when you're wrong doesn't mean we're confirming that you're right.
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So why do you think they did hold rates at 0.1%?
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I think it was a very close call.
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And Governor Bailey said that they are telling us that they are going to or they anticipate having to raise interest rates at some point in the coming months.
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But they see some value in just waiting through the winter.
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There's a few sources of uncertainty.
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One is, you know, winter wave of COVID.
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But more importantly, perhaps the end of the furlough scheme and what that does to the labour market.
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So, you know, given that they are targeting inflation,
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not for, you know, the first half of 2022, but two to three years out, there's actually a bit of value in just waiting to see those sources of uncertainty play out and take the decision when you have that little bit more information.
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So is this a hawkish hold?
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That's a really interesting question because I mean, first of all, the Bank of England has raised its near term inflation forecast.
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So it now sees CPI inflation topping out at close to 5%, which is very, very high by the standards of its historic forecasts.
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But that's not really the most important number here.
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The most important number is where does inflation get to kind of two to three years out, given that the market assumed that rates would be rising to 1% in fairly short order.
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So the Bank of England gave us two different answers to that question.
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The first answer, which we might call the central case, says that actually inflation stays relatively high, only just on target sort of three years out, which essentially endorses that profile of four rate rises.
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But it gave us an alternative scenario whereby energy prices fall back in line with the futures curve.
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And on that profile, inflation falls back to to 1.7 percent.
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And that looks distinctly less hawkish.
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So what you think happens to energy prices really determines whether you interpret this as a hawkish hold or a more dovish one.
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Liz, thanks very much for your time.
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Thank you.
FOMC's Tapering Decision and Market Expectations
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Across the Atlantic, asset purchase tapering was the key item on the agenda at this week's FOMC meeting.
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To find out more, let's hear from Ryan Wang, US economist.
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Ryan, welcome to the podcast.
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Hi, Piers.
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Thanks a lot.
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So, Ryan, firstly, can you summarize what happened with the FOMC yesterday?
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Sure.
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Well, the Fed pretty much delivered on expectations as far as tapering is concerned.
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If you look at the past year, the FOMC has been purchasing $120 billion per month in securities.
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And we now know that the first reduction will occur in the middle of November, a step down of $15 billion, same incremental step down in the middle of December.
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And if the Fed stays with this tapering speed, it puts the Fed on course to end its asset purchases by the middle of 2022, specifically in the middle of next June.
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So as we heard earlier, it's a bit of a contrast to compare in the sense that we clearly saw a surprise for the market in terms of what the Bank of England delivered.
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Whereas here, is it fair to say that there was really no surprise whatsoever?
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Well, that's an interesting point, Piers.
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If you look at it, and Powell alluded to this in his press conference, actually, compared with market expectations a few months ago,
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Tapering has actually been delivered a little bit earlier than expected and is really on schedule to be concluded also a bit earlier than previously thought.
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But we know from the Fed's communications over the past six weeks or so that it does like to lay out and explain its thinking to the markets.
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And overall, it also shows that the Fed is likely to stick with a gradualist approach to its policy decisions going forward.
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So have you seen a change in market expectations following this FOMC meeting?
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Well, one question that came up prominently also in Powell's press conference related to the federal funds rate.
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And specifically, Powell was asked, are the markets right to be pricing in one to two rate hikes in 2022?
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And Powell didn't address this question directly, but he did say that the FOMC would likely be patient.
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And importantly, that it would respond to the incoming data, particularly on inflation.
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And so this is really going to be the key over the next six to nine months.
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The FOMC expects inflation to be moving downwards by the second quarter or the third quarter of next year.
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That's really their baseline view.
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And so if that view is challenged and inflation stays higher than expected, well, then rate hikes could come
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as soon as the middle of next year, shortly after the conclusion of tapering.
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But under the Fed's baseline view, the FOMC can, like I said, be a little bit more patient and wait to see how inflation and also how employment evolve over the next year.
Fed's Communication Strategy and Future Rate Hikes
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And whatever the data is, is it safe to assume that whilst Powell is chairman of the Fed, the communication policy is going to remain very clear and transparent?
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Well, I think the emphasis is really going to be that the outlook depends on what happens to the economy.
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So the tapering decision has been made.
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It's partly to position U.S. monetary policy against the full range of potential outcomes, which certainly includes inflation persisting at a high level well into next year.
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And where we go forward in terms of rate policy will depend on how inflation evolves and also
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issues involving whether we see any reduction in the supply bottlenecks that are affecting the economy, whether we see and to what extent we have an improvement in labor supply over the months ahead.
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These are some of the key variables that the policymakers will be paying close attention to.
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Ryan, thank you very much.
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Thanks a lot.
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The COP26 climate summit has been underway since Sunday.
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Weixin Chan, our head of climate change research, has been following the proceedings closely, and he spoke to Graham Mackay about how talks have progressed so far.
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Weixin, welcome to the podcast.
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It's great to be here again, Graham.
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So let's get an overview on COP26.
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It's certainly had a lot of press coverage.
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Give us an update on how the conference has been going so far.
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The mood has been surprisingly positive, actually.
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There's been big statements from world leaders.
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There's been a lot of big announcements from various groups on a variety of different topics.
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So I'd say it's opened with a big bang.
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However, we are not there yet.
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There's been only a little increase in the financing.
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pledges for developing countries, etc.
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And the negotiations have been happening quietly in the background.
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So what about the pledges that have been made so far?
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We've sort of seen a lot of promises made.
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What are your thoughts on translating
Reflections on COP26 and Climate Pledges
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this into action?
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There's been a number of headline pledges, as you say, from India, Thailand, Vietnam, Nepal, Nigeria.
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I think these have been quite nuanced announcements.
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They're not all the same.
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Some come with conditions of only carbon dioxide emissions or we're bringing it forward by a little bit.
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etc so pledging is one thing and implementing is another it will take policies it will take domestic legislation and the u.s has seen its share of problems on that issue recently a few countries provided details to be honest um and we're expecting more details in the future i mean if you look at the historical net zero pledges the eu's was the most comprehensive we've had some details from japan
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And China, not much, to be honest, from the new announcements that would be made at COP26.
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So I think there'll be pressure to A, set it into legislation domestically through parliaments or otherwise, and B, provide the policy implementation details.
Real Action Needed Beyond COP26 Commitments
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What I can say, there's probably a lot of room for improvement in all of these.
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Indeed.
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We've also seen some new coalitions launched in the past few days.
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Tell us about those and their significance.
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Yes, the UK structured some focus days as hosts of COP26, and that's been very interesting, actually.
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We've had forests, finance, energy.
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We've got youth, nature, transport, and cities to come.
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Three, four of the big ones, the Deforestation Pledge, this is known as the Glasgow Leader's Declaration on Forests and Land Use,
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We've now got about 128 countries signed up.
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The key points are on conservation, trade and development policies that don't drive future deforestation and land degradation.
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They're trying to align financial flows to look after forests.
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That's a mix of public
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and private finances and it's good because forests are a carbon sink yet when deforestation happens we get a lot of emissions we have however had deforestation pledges in the past and they haven't always gone so well so we'll have to wait and see another big announcement was the methane pledge the u.s is leading an alliance of around 90 countries to set out a new regulatory
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framework to limit methane emissions globally by 30% by 2030.
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It's important given the global warming potential of methane, but there's work to be done here.
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China, India, Russia not participating, for example, and there are many that believe that 30% is not enough.
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We should be doing a lot more than that by the year 2030.
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we've had a flurry of coal announcements phasing out of coal power supporting certain economies to accelerate the closure of coal-fired electricity that's been that's been good the the powering past coal alliance now has 165 members so 28 new members from cop 26 some countries so the ukraine chile
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Singapore and also some new financial institutions.
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That's encouraging, but we need to see real action, especially domestically.
Technical Negotiations at COP26
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Again, pledging is not implementing.
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Headline announcements are all well and good, but what's been happening behind the headlines, the real sort of nitty gritty of a summit like COP26, the negotiations that are going on?
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Yes, these have been less prominent in the opening days, given the big announcements from world leaders, but the negotiations have been moving along in the background.
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Discussions on the ambition levels of climate pledges, how to make finance more prominent and transparent, issues such as loss and damage, adaptation, and of course Article 6 of the Paris Agreement.
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So we've really moved into the technical aspects of Article 6, the scope, the governance, the oversight.
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the transfer limits and flexibility, things like that.
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No surprises yet, it seems like most parties have fallen back to their traditional negotiating lines that are quite familiar.
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As the leaders have flown out, however, we think negotiators will have more room, maybe that's figuratively and physically, to get on with the negotiations, and there is a long, long way to go there.
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Indeed.
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Well, plenty more to come.
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Actually, how much longer does the conference run on for?
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It should be running on until the 12th of November, which is a Friday, although we expect it to overrun given the difficulties in reaching some agreements.
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So it's going to keep us busy for quite a while.
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All right.
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Well, watch this space.
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Weixin, thank you very much as always.
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Thank you for having me, Graham.
Impact of Pandemic on Automation
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Automation is one of our key themes here at Global Research.
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This week, our team from across the asset classes looked at the implications of the accelerating pace of automation in today's workplace.
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James Pomeroy, Global Economist, is here to talk us through the findings and also update us on the launch of Africa's first central bank digital currency.
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James, what impact has the pandemic had on the move towards the automation of certain roles?
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It's really interesting because at the beginning of the pandemic, we're in the midst of it in most parts of the world.
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The biggest challenge was things like social distancing and making sure that you had people spaced apart in certain functions.
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And that's a clear incentive to automate some of those processes so that that's possible.
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But actually, as we've come out of this side of the pandemic and we're starting to see labour shortages across much of the world and very, very strong increases,
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in wage costs.
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We're seeing businesses trying to have to think about what they can do next.
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Can they make their business run more effectively?
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Can they do things differently?
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And that's making automation feel much more attractive than maybe it was before the pandemic began.
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Which jobs are most at risk from increased automation?
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And are there differences between what's happening in developed and emerging markets?
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So there's a lot of types of jobs that are vulnerable and it's not necessarily sector specific.
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It's generally sort of thinking about skills based.
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So anything that requires us to do very, very similar tasks to a robot can.
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So if you think about jobs in manufacturing or retail or some of these sorts of jobs, there's certain processes that can be automated relatively easily.
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Whereas some sectors are much less at risk where for what
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we're doing as human beings is providing sort of creativity or management or those sorts of things that robots aren't necessarily very, very
Balancing Automation Risks and Opportunities
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good at.
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And that's why you've got a bit of a distinction between developed and emerging markets.
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Actually, a lot of the jobs that are currently based in emerging markets, so a lot of manufacturing jobs, a lot of agricultural jobs are ripe for automation.
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But at least in the near term, we don't think that's as much of an issue because the cost of labor in those parts of the world is still considerably cheaper than the cost of those robots.
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Whereas in the developed world, when you've got wages increasing rapidly for workers in these sorts of industries, that tradeoff between employing a person or investing in the automated process is getting closer and closer.
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And we think actually this could be the trigger to see much, much greater investment in automating process in the developed world now.
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and maybe in the emerging markets further down the line.
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What are the positive aspects of automation?
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I think there's a lot of things that can be good, particularly in terms of making a lot of jobs much, much more productive.
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You can allow people to not do a lot of boring tasks.
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You can take away some of those sort of mental challenges that come from that too.
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You can make jobs much more interesting by automating away those boring bits.
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We could also see a creation of many more jobs.
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If you think about one thing we know that a lot of automation is going to do,
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It's going to create more time.
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That extra time could be spent in a number of different ways.
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It could be consuming more services.
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It could be consuming content.
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And all of these things themselves create more jobs.
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And I think that's an opportunity there too.
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But also there's a safety angle here as well.
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And we could start to see many jobs being much safer, which of course is very good news.
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So yes, automation generally carries with it a sort of a sense of doom that there's jobs that are disappearing.
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But we should also keep in mind that there's jobs a bit
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can be created, they're likely to do better jobs, more productive jobs, and of course can improve safety too.
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How should governments respond to all this?
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So the big challenge is that the types of jobs that are lost and the types of jobs that are created are very different.
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They require very different skill sets.
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And I think re-skilling is going to be massive in the course of the coming few years.
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Governments are going to have to invest heavily on making it possible for people to retrain, to re-skill, to be mobile in terms of the jobs
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that they're taking.
Nigeria's Central Bank Digital Currency
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And if they can do that, then actually, I think you can get some positives.
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But if you don't invest in those in those training programs and those skills programs, actually, the impact of automation can be much more negative.
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And we could see a bigger hit to potential growth and potentially higher unemployment in those economies who don't do that.
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Switching focus, you've also written extensively about central bank digital currencies.
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And Nigeria has just become the first country in Africa to launch such a currency known as the e-Naira.
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Why have they done this?
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So it's interesting.
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A lot of emerging markets have a big incentive to start investing in creating their own central bank digital currencies because it's a great opportunity to massively increase financial inclusion.
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Getting people banked, getting people using digital payments, we think could be transformative for emerging markets over the course of the next decade or so.
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And it's interesting that we think a lot about central bank digital currencies in the West, we think about the Fed or the ECB or the Bank of England, and the progress has been really, really slow because there's a whole load of questions these central banks need to answer.
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There's a lot of risks involved in terms of what if it disrupts the current financial system.
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But if you're in an economy like Nigeria, where the banking penetration rate is very, very low, the upsides are much, much greater than the potential downsides.
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And so you're seeing far, far greater progress
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in the emerging world to try and do that.
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And it's interesting that the E-Nera came so quickly in the course of about six months, came from sort of really getting into the ideas, into releasing it.
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And it sets the scene, I think, for central bank digital currencies to become much, much more popular, much, much more widespread across the emerging world in the coming years.
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And I think it's a very interesting topic, but it's much more of an emerging market one than a developed market one at the moment.
Conclusion and Invitation to Learn More
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And that's where I think investors focus and will shift.
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James, that's a great summary.
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Thanks very much.
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Thank you.
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So that's it for this week's podcast.
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Thank you to Liz Martins, Ryan Wang, Weishin Chan, and James Pomeroy for joining us.
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From all of us here, thanks for listening.
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We'll be back again next week.
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Thank you for listening today.
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This has been HSBC Global Viewpoint Banking and Markets.
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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.