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USD update, bond yield drivers, China’s fiscal policy - HSBC Global Research
23 Plays4 years ago
Paul Mackel explains why we see the US dollar strengthening, Steven Major looks at the factors that really matter for bond yields and Jingyang Chen outlines China's plans ramp up fiscal spending. Disclaimer
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Introduction to HSBC Global Viewpoint Platform
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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.
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Macro Viewpoint by HSBC Global Research
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Hello and welcome to the Macro Viewpoint by HSBC Global Research.
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where we look at the key reports published by our economists and strategists over the past week.
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I'm Aline Van Dyne.
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And I'm James
US Dollar Strengthening Factors
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Pomeroy.
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Coming up on this week's podcast, we speak to Paul Mackle, Global Head of FX Research, about why we now see the US dollar strengthening further.
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Stephen Major, Global Head of Fixed Income Research, explains why a focus on Fed tapering might be missing what really matters for bond markets.
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And we speak to Jingyang Chen, Greater China Economist, to find out why China is looking to ramp up fiscal spending in the second half of the year.
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This podcast was recorded on Thursday, the 12th of August 2021.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
Impact of Fed Policy on FX Market
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We start this week in the currency market, where our team have just updated their view on the US dollar.
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Let's get the details from Paul Mackel, Global Head of FX Research.
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So Paul, you are now expecting a stronger dollar.
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What are the key drivers behind the change in view?
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It comes down to two factors that we've been emphasizing for some time, but we believe our timing has been wrong.
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So what I mean by that is we buy into the idea that the dollar itself is very sensitive to the global growth cycle.
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And with that, we thought that the dollar would begin to slowly recover later this year and extend that going into 2020, 2022.
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However, signs are clearly telling us that global growth has been peaking on a sequential basis lately.
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And that told us that we need to pull forward the timing of our dollar recovery.
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The second feature just comes down to the Fed itself.
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It's very well known and discussed and should be anticipated that the tapering process will begin and most likely at the end of this year.
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However, it's the importance of divergent monetary policy which we think will continue to play out in the FX market.
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And if that's the case with the Fed gradually on this path of policy normalization against the likes of the ECB, which seems to be very much stuck in a slow gear, that tells us that directionally, EURUSD will probably continue to sag very gradually.
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But we think the direction of travel is for the exchange rate to come down.
Digital RMB and FX Market Implications
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Your report also looks at the RMB and the rollout of its digital form, the ECNY.
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We've seen more than 70 million transactions already, plus a white paper from the government on its outlook for the currency.
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What are the main points that investors need to be considering?
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Well, we're very much getting a sense of how close they are to potentially launching this officially.
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There's more detail to it.
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The trials are getting bigger in terms of testing it.
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And we're waiting for indications about when such trials could be enhanced or accelerating from a cross border perspective.
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That's still some time away.
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When it does go cross border, then indeed it could have exchange rate implications.
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For now, however, again, the long standing argument hasn't changed for us.
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It's about being deployed for domestic purpose only, which in turn doesn't mean anything for the FX market, frankly.
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But what I'm saying is that the technological change here is advancing very quickly and we may be nearing a point where the official launch could be relatively in the not too distant future.
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Paul, thank you for the update.
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Thank you very much.
Influences on Bond Yields Beyond Immediate Data
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Moving to the bond market, Steve Major, Global Head of Fixed Income Research, has been looking at why focusing on near-term data surprises could be missing the key drivers of bond yields.
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Let's hear from him now.
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He spoke to Chris Brown-Humes earlier.
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Steve, can we start with the big picture?
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US 10-year Treasury yields were above 1.7% in March.
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Today, they're around 1.3%.
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They've even been below 1.2%.
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Why have yields come down so much when the latest US inflation figures have actually been higher than they were back in March?
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A lot of the inflation expectation had been factored into prices well in advance, Chris.
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And the other thing is when those prints came through, the market was ready.
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And what matters to bond yields is much more than the monthly print.
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It's where that inflation is going.
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In this report, we've identified what really matters to bonds and we look at the longer term equilibrium rates, we think about the global backdrop and ultimately some of the near term focus that the markets have like inflation or tapering just don't do it.
Tapering vs. Long-term Interest Rate Trends
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Let's start then with tapering because the market's clear focus in the next few months is going to be tapering, isn't it?
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Well, you're right that everyone's talking about it, but it doesn't make it correct to be the main focus.
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It seems that markets are conditioned by the memory of the taper tantrum from 2013 and central banks may well be conditioned by that.
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I think there's a great deal of difference in terms of 2021 in terms of the scale and the way the guidance has changed.
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We now have flexible average inflation targeting, for example.
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It seems to me that the tapering and eventual non-reinvestment are even going to be key instruments in the tightening process.
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So there's a lot to say on this.
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And I think that tapering, it might get some headlines.
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But what really matters is the path of rates to the longer term terminal value and the global picture.
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So, Steve, what is it that really matters?
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So the terminal rate is what really matters.
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And we've got some guidance from the Bank of England on this.
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The fact that they will be tapering and they've announced in advance what their plans are with reinvestment and even future asset sales, that influences the rates that they're going to go to.
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Now this is clearly true for the Fed and other central banks as well.
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So there's a big read across from the Bank of England to the Fed here.
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And we're convinced that we should be building scenarios and gaming the possibilities for the path of the short rate based on a much lower terminal rate than the consensus is thinking about.
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Just shortly, the second factor on the global backdrop
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is really the fact that yields have been falling in China, Europe, and the US, of course, in the last few
Global Yield Trends and US Treasury Markets
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months.
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And you can see it in terms of basis points.
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If you draw a chart from the start of this year, all of those yields are coming down.
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We can't prove it, but there's definitely some influence from China and Europe on what's happening in the US.
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And I think you're also identifying another factor that could influence the Treasury market, which is a reduction in Treasury supply.
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Yeah, we mentioned supply to deal with the tapering narrative.
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So first of all, I'll be very clear, in the longer run, we don't think tapering matters.
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We've done a lot of work on QE.
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It's about signaling future intentions.
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And I think the market is misguided if it thinks that the actual asset purchases are driving the yields lower.
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I don't think that's correct.
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There's academic work supporting that.
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We've done work on it.
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The other thing is the supply of bonds in the longer run doesn't really matter either.
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We have written about that.
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But if you want to focus on this, and it is your bag, it's your narrative, I would say that, yes, whilst the Fed is reducing its asset purchases when it starts the tapering, the US Treasury is projecting much reduced supply.
Impact of Reduced US Treasury Supply
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In fact, the reduction in the supply of bonds
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is more than the reduced purchases by the Fed.
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So there you have it.
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Steve, that's a very clear summary of your thinking.
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Thanks very much for your time today.
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Thank you, Chris.
China's Fiscal Spending and Economic Measures
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We finish up this week in China, where, with growth momentum slowing, Beijing is expected to rely more on targeted fiscal easing.
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Jingyang Chen, Greater China Economist, joins us now.
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So, Jingyang, why is the government looking to fiscal spending to support growth?
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The recent Politburo meeting calls for more proactive and more speedy fiscal spending in the second half of the year to support the economy.
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We think there are two reasons why the government urges for faster fiscal spending.
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First is that fiscal spending has largely lagged behind the budget in the first half.
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Total fiscal expenditure only reached around 43% of the total budget this year, which is a significantly lower share compared to previous years.
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Government bond issuance has also been slow.
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Local government bonds, special bond issuance, has only used around 30% of four-year quota in the first half.
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The second reason for a more proactive fiscal policy stance in the second half is because that the economy is facing
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increasing headwinds.
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Property investment is set to slow down amid tightened financing rules.
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Meanwhile, domestic consumption will likely take another hit from the recent widespread of the Delta variant of COVID-19 cases.
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So where do you expect to see this investment?
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We believe that infrastructure investment will still be a focus of fiscal spending in the second half, especially as the Politburo meeting calls for
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faster construction of key projects under the 14th five-year plan.
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In addition, we believe there is more room for local governments to put in more efforts in ICT infrastructure investment as well as investment in environmental protection.
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Meanwhile, we believe monetary policy will also need to lend some support.
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The central bank will likely continue with its marginal liquidity injection to meet rising liquidity demand amid rising government bond issuance,
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as well as to stabilize credit groups.
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Jingyang, thanks very much for the update.
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Thank you.
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That brings us to the end of today's program.
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Thank you to our guests, Paul Mackle, Steve Major and Jingyang Chen.
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We're taking a short break for the summer.
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So from all of us here, thanks for listening.
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We'll be back in a couple of weeks.
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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.