Transcript
Speaker: The following podcast was recorded on the 8th of June by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on a link attached to your media player.
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Speaker: Now, on to the podcast.
Speaker: Hello, I'm P.S.
Speaker: Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: Here's what's coming up this week.
Speaker: China's economic momentum is slowing.
Speaker: So is this it for the recovery?
Speaker: We find out why there might not be any quick fixes.
Speaker: We look at how the latest economic data have clouded the monetary policy outlook in the U.S. And we take a step back to look at some of the big picture drivers of the U.S. dollar.
Speaker: China's recovery has been one of the themes dominating economic debate this year.
Speaker: But some of the latest data releases have been weaker than expected, leaving investors wondering how much further the recovery has to go.
Speaker: So how will policymakers respond?
Speaker: Jing Liu is our chief economist for Greater China.
Speaker: She spoke to Gray Mackay earlier.
Speaker: Jing, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So let's start with the title of this latest piece on China's recovery, Beyond a Quick Fix.
Speaker: How big a fix is needed?
Speaker: In this piece, we're trying to answer two key questions on investors' mind.
Speaker: The first one is, is China's recovery losing steam?
Speaker: The second one is, given the data has disappointed, will Beijing do anything about it?
Speaker: Okay, let's take those questions one by one, starting with is the recovery starting to run out of steam?
Speaker: I mean, I think at this point, consensus is that the answer is pretty much yes, is it not?
Speaker: Well, I would say actually it's more nuanced than that.
Speaker: Probably people have very high expectation from the beginning of the year and also expect Beijing to come in and use the old toolbox to stimulate the economy.
Speaker: But the reality tends to be this is more an organic growth in the sense that we will see
Speaker: imbalances and certain sectors such as service consumption outperforms.
Speaker: Others might take slightly longer time.
Speaker: Is there any industry in particular that you're looking to gather steam to really support the recovery that maybe hasn't quite gathered that momentum just yet?
Speaker: Well, for the consumption, for example, we see the service sector booming first, and that will bring back jobs, that has brought back jobs already.
Speaker: And then, you know, when there's a steady income, steady outlook for job market, we will see people start buying on the goods as well.
Speaker: Now, part two of your report looks into the question of will Beijing roll out significant stimulus to maybe shore up the recovery and maximize its potential.
Speaker: Now, we've seen this historically in China on a number of occasions, I suppose most notably during the financial crisis, that 4 trillion RMB stimulus package.
Speaker: But that was quite a long time ago.
Speaker: Things aren't necessarily the same anymore.
Speaker: And what are your thoughts on a potential offering from Beijing in that regard?
Speaker: Indeed.
Speaker: Actually, some people are quite disappointed because they thought Beijing should have come out and roll out the stimulus plan already.
Speaker: But in reality, it seems like policymakers are much more patient this time around.
Speaker: It's not that they don't care.
Speaker: We believe they still have the pro-growth mentality.
Speaker: The reality is that they need to basically balance a short-term recovery with some longer-term challenges.
Speaker: In particular, they don't want the stimulus plan to contribute to the structural imbalances.
Speaker: What sort of structural imbalance would they be risking potentially?
Speaker: So for example, in the past, we're very familiar with the recipe, the investment-led kind of growth, for example, infrastructure investment, housing investment, and probably large liquidity injection by PBOC as well.
Speaker: This time around, it looks like when they evaluate which policy might be the best they need to
Speaker: calculate the cost and benefit.
Speaker: For example, if they roll out a lot of public investment in infrastructure, will that crowd in or crowd out the private investment?
Speaker: And to what extent there's still enough room for local governments, for example, to actually contribute to the construction of infrastructure investment, etc.
Speaker: Do you think that there is a definitive answer to the question of will Beijing step in to stimulate the economy at this time?
Speaker: I think the answer is yes, they will do it more proactively if there's, you know, a concern about financial stability.
Speaker: Otherwise, they will be more patient and the measure they will roll out tend to be more structurally oriented, like supporting the strategically important sectors, etc.
Speaker: Alright, and what about looking ahead, Jing?
Speaker: Any key events that we should be thinking about that may give us a flavor of policy direction in the future?
Speaker: Yes, indeed.
Speaker: The end of July, we should have the Politburo meeting.
Speaker: This one usually will focus on economic policy, so it probably will give a blueprint with respect to the big direction of the policies.
Speaker: And then the third plenum and the National Finance World Conference,
Speaker: We should probably see it end of third quarter, beginning of fourth quarter.
Speaker: That could give us, you know, more clear guidance on economic policies and, you know, the complementary financial policies to be expected in the following years.
Speaker: All right.
Speaker: Well, we'll be sure to keep a lookout for those events and any guidance that comes out along with them.
Speaker: Jing, thank you very much, as always.
Speaker: Yeah, thank you.
Speaker: Now, from one economic powerhouse to another.
Speaker: The US debt ceiling may have been resolved, but attention is now turning to monetary policy.
Speaker: Aline, what's the story?
Speaker: That's right, Pierce.
Speaker: The Federal Reserve is set to meet next week, and the latest employment data have made the picture more complicated.
Speaker: Ryan Wang, our U.S. economist, is here to explain.
Speaker: Ryan, thanks for joining us.
Speaker: Hi, Eileen.
Speaker: What are you expecting at next week's FOMC meeting?
Speaker: Well, we made an adjustment, a slight adjustment, to our forecast for the policy rate.
Speaker: We expect the FOMC to leave the federal funds rate unchanged in June, and
Speaker: to skip a meeting, if you like, with respect to rate hikes.
Speaker: But we now expect that the FOMC's final 25 base point rate hike for this cycle will be delivered at the July FOMC meeting.
Speaker: So in some sense, what is happening is that the Fed is still focused on controlling inflation and bringing it lower.
Speaker: But at the same time, given the rapid rise in rates over the past year, the policymakers are taking more time between these decisions.
Speaker: and they're stretching out the rate hike process, you might say.
Speaker: So Ryan, what is the inflation picture looking like?
Speaker: And also, what about the jobs markets?
Speaker: Because the tightness there has obviously been a concern too.
Speaker: Well, really, if you look at the data that's come through this year, there's been a notable lack of downward progress, particularly on core PCE inflation.
Speaker: This is a measure that the FOMC tracks very closely.
Speaker: The core PC inflation rate actually edged up a bit to 4.7% in April.
Speaker: And that is well above the Fed's most recent forecast.
Speaker: that core piece inflation would fall to 3.6% by the end of this year.
Speaker: If you take this into account along with what's happening in the labor market, where there has been some anecdotal evidence that the job market may be becoming a little bit less tight, but overall there's still some difficulties for businesses in attracting and retaining workers.
Speaker: Well, it just means that the feds battle against inflation
Speaker: is not yet complete.
Speaker: And that's why the Fed may still have to consider rate hikes later this year.
Speaker: So you're painting a relatively hawkish outlook there.
Speaker: What are some of the other key risks or factors that play into this?
Speaker: Well, that's right.
Speaker: I think the FOMC is carefully weighing the risks of persistently high inflation against the potential downside risks.
Speaker: Now, these relate to a few different areas.
Speaker: Of course, we have the banking sector stresses that have intensified since March.
Speaker: That's also having an impact on credit standards, which are being tightened for both businesses and households.
Speaker: And also there's risks related in particular to the commercial real estate sector.
Speaker: And so part of the idea of potentially skipping the June meeting is to take more time to assess these risks and to see how the data is evolving both on the macroeconomic side and also in terms of what's going on in the financial sector.
Speaker: So we actually expect the outcome at the June FOMC meeting to be a compromise.
Speaker: No change in the federal funds rate, but an emphasis that future rate hikes have not been ruled out.
Speaker: We expect to see that both in terms of the committee's projections and also in terms of the tone at Fed Chair Jerome Powell's press conference.
Speaker: Ryan, thank you so much for the update.
Speaker: Thanks, Aline.
Speaker: We stick to the US theme now, but switch to currency markets.
Speaker: And as the dust settles on the debt ceiling drama, Dominic Bunning, head of European FX Research, has been looking at which forces are likely to influence the green bank's path.
Speaker: He joins me in the studio now.
Speaker: Dom, great to have you back on the podcast.
Speaker: Thanks, Piers.
Speaker: So yes, even before the debt ceiling, we had the sort of failure of Silicon Valley Bank, SVB.
Speaker: Then everybody was focusing on the debt ceiling.
Speaker: Now, what is likely to drive currency markets now that we got through this?
Speaker: Yeah, it's a great question because over the last few months, when we look at some of the traditional drivers of currencies, that's normally things like bond yields or what's happening in equity markets, commodity markets, the relationship for currencies and those drivers has dropped quite a lot across a lot of different currencies.
Speaker: So FX markets are to some degree without an anchor at the moment.
Speaker: And that's what we focus in.
Speaker: on the currency outlook, we sort of try and take a little bit of a step back and think about what is going to be the anchor for the dollar going forward.
Speaker: And indeed taking a step back has meant kind of looking at phases in the history of the FX markets.
Speaker: And there are in fact two very distinct phases.
Speaker: Yeah, absolutely.
Speaker: So what we've done is we've thought about both how yields and equities impact currencies, but also how bond yields and equities react to each other.
Speaker: And that's really where you've seen these two distinct periods historically.
Speaker: So if you go back to the sort of mid 70s through to the late 90s, generally speaking, US yields and equities were negatively correlated.
Speaker: So generally speaking, when yields were going down, equities were going up.
Speaker: And then in the late 90s to early 2000s, that completely flipped.
Speaker: And from 2000 through to basically the start of the pandemic, what you had was the opposite.
Speaker: So you had an environment where yields and equities were positively correlated.
Speaker: So when yields are going up, equities are going up in general.
Speaker: So that's a really clear distinction, two very clearly different eras.
Speaker: And what's interesting is that the dollar's reaction to yields and to equities in those different eras was very different.
Speaker: And that is really what this piece gets into detail on.
Speaker: So is it almost like a decision tree where you sort of have to decide which of those periods of histories you might sort of be coming back to?
Speaker: And then within that, how different drivers work?
Speaker: Where are you on that?
Speaker: Yeah, that's exactly right.
Speaker: So your first decision effectively is to say, are we going to be in this 1970s, 1980s world where we had high inflation, high rates, lots of macro volatility, or are we going to be back in the kind of post 2000 world?
Speaker: And the reason the FX market struggled with this is that bond equity relationship over the last couple of years has been really volatile in itself.
Speaker: So where you settle is really important.
Speaker: And the reason it's important is this.
Speaker: If you go back to that 1970s, that earlier period,
Speaker: What happens is the dollar, the dollar's performance tends to be dominated by what happens to US yields.
Speaker: So when US yields go up, the dollar generally goes up.
Speaker: When US yields go down, the dollar generally goes down, regardless of what equity markets are doing.
Speaker: You then flip into that more modern period, that post 2000 period and the opposite happens.
Speaker: The dollar's relationship with yields is much less consistent and the relationship with equities is much more consistent.
Speaker: So in that post 2000 environment, the dollar was reacting much more to equities than it was to yields.
Speaker: And that is why it's important to try and figure out what environment we're going to.
Speaker: And that, I think, is the question we're trying to answer in the piece.
Speaker: Where would you be leaning towards?
Speaker: Yeah, so we generally think we're probably still going to be in that post 2000 type environment.
Speaker: And that's certainly what the latest bond equity correlation is pointing us towards.
Speaker: You know, inflation is coming down fairly quickly.
Speaker: Rate volatility is dropping.
Speaker: Equity markets seem to be finding a bit more of a base and we're seeing a bit more of an improved environment for risk appetite.
Speaker: In our view, that does lean us more in towards that latter phase, but also it leans us into an environment where, in terms of our base case, US yields probably do drift a bit lower from here.
Speaker: Equity markets are generally relatively well supported.
Speaker: And that puts us in an environment where the dollar should broadly weaken from here.
Speaker: So just to confirm that, on a three to six month view, do you still expect weakness on the dollar?
Speaker: Yeah, so through the end of this year, we've still got a weaker dollar in our forecast.
Speaker: You know, we've got euro dollar heading to 115.
Speaker: We've got cable heading to 130.
Speaker: Partly reflects the dollar view, but it partly reflects some of the positives we've seen in this region, which we've spoken about on other podcast episodes before.
Speaker: Indeed, we have.
Speaker: Dominic, thank you for joining us.
Speaker: Thanks very much.
Speaker: So that's it from us.
Speaker: Thanks to our guests, Jing Liu, Ryan Wang and Dominic Bunning.
Speaker: Don't forget to subscribe to The Macro Brief wherever you get your podcasts.
Speaker: And we'll be back again next week.
