Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
The Macro Brief – The UK’s holding pattern and the USD’s false summit
33 Plays1 year ago
Liz Martins considers how the latest macro data could affect the UK’s next rate decision, and Daragh Maher looks at whether the dollar can continue to strengthen. Disclaimer: https://www.research.hsbc.com/R/61/trpqhfp Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
Hosted on Acast. See acast.com/privacy for more information.
Recommended
Transcript
Podcast Introduction
00:00:00
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.
00:00:11
Speaker
Make sure you're subscribed to stay up to date with new episodes.
00:00:14
Speaker
Thanks for listening.
00:00:15
Speaker
And now onto today's show.
00:00:16
Speaker
The following podcast was recorded on the 26th of October, 2023 by HSBC Global Research.
00:00:22
Speaker
All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
00:00:27
Speaker
And don't forget that you can subscribe to this weekly podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Bank of England and UK Economic Data
00:00:37
Speaker
Hello, I'm P.S.
00:00:38
Speaker
Butler and welcome to the Macrobrief.
00:00:40
Speaker
We've got a bit of a mixture of content for you this week.
00:00:43
Speaker
Later in the program, we're going to catch up with Dharamar to find out whether the U.S. dollar can continue to push higher.
00:00:48
Speaker
But first, we're focusing on events here in the U.K.
00:00:52
Speaker
The Bank of England is meeting on the 2nd of November.
00:00:55
Speaker
And I'm joined in the studio by Liz Martins, senior U.K.
00:00:57
Speaker
economist, to take a look at recent macro data and what its likely impact is on any rate decision.
00:01:04
Speaker
Liz, welcome to the podcast.
00:01:05
Speaker
Thank you.
00:01:06
Speaker
Good to have you back.
00:01:07
Speaker
And ahead of a Bank of England meeting on the 2nd of November, ahead of that, we haven't had a shed load of economic data on the UK, but we have had a couple.
00:01:17
Speaker
One was labour market data, which was experimental.
00:01:22
Speaker
Can you sort of explain?
00:01:23
Speaker
Yeah, so the Office for National Statistics has been telling us for a while that they're not too happy with the Labour Force survey, because the response rate has fallen a long way.
00:01:34
Speaker
So they're telling us that they're transforming the data, and they're going to give us a new methodological overhaul with the results coming out in the spring.
00:01:41
Speaker
And in the meantime, we just have to be happy with this kind of imperfect solution.
00:01:47
Speaker
What they've done in this release is they've said, well, look, we're going to use other forms of data like the tax data, the
00:01:54
Speaker
pay as you earn income tax data and also the claimant count of benefits claimants to try and get a more accurate rate of change in unemployment.
00:02:05
Speaker
But if you're applying the correct rate of change to the wrong starting point, you're still none the wiser.
00:02:11
Speaker
So basically there's a cloud of uncertainty over how high or low unemployment really is in the UK.
00:02:17
Speaker
So if you were to sort of hazard a guess, what would you say is a trend in unemployment currently?
00:02:23
Speaker
I think if we put together the surveys, the imperfect data we have, and also the anecdotal evidence that we get talking to our corporate clients, it is quite clear that the labour market has unwound a bit.
00:02:35
Speaker
It's nowhere near as tight as it was kind of a year ago.
00:02:38
Speaker
It's easier to hire than it was.
00:02:41
Speaker
And some companies talking about reducing headcount, maybe more through attrition.
00:02:46
Speaker
rather than outright redundancies, but certainly a looser labour market.
00:02:50
Speaker
The question is though, is unemployment really, has it risen as much as the official numbers say, or could we have more of a kind of Goldilocks world like we have in the US where you've seen inflation come down without a real rise in unemployment?
UK Economic Challenges and BOE Rate Decisions
00:03:03
Speaker
Now the other bit of macro data that we've had is the UK PMI for October.
00:03:07
Speaker
First you remind us what that measures and then what was the reading?
00:03:10
Speaker
So the PMI is a survey of business activity and essentially just asks companies in manufacturing services and construction, you know, did your output increase or decrease this month?
00:03:20
Speaker
Simple as that.
00:03:20
Speaker
And it's just a survey of growth.
00:03:23
Speaker
Unfortunately, it's not showing us any growth in the UK this time around because all three sectors are below 50.
00:03:30
Speaker
So indicating contraction.
00:03:32
Speaker
Services only just below, so not terrible.
00:03:35
Speaker
Manufacturing some way below, unfortunately.
00:03:38
Speaker
So putting that together, the consensus seems to be that the Bank of England is going to leave its rate unchanged.
00:03:45
Speaker
Is that our view?
00:03:46
Speaker
Yeah, it is our view.
00:03:47
Speaker
So obviously we've still got too high inflation.
00:03:50
Speaker
Wage growth is not consistent.
00:03:52
Speaker
It's still too high to be consistent with the inflation target.
00:03:55
Speaker
It's coming down slowly, but it is coming down.
00:03:58
Speaker
And then you add in all those red lights flashing like the weaker PMIs, like a fall in consumer confidence.
00:04:06
Speaker
And we think the BOE probably is happy to at least pause from here.
00:04:10
Speaker
So we don't expect a rate rise in November.
00:04:12
Speaker
I don't think any of our counterparts do or the markets or anyone really.
00:04:17
Speaker
There's a sense that the BOE may not quite be done.
00:04:21
Speaker
Rates may have to rise again, but it's not going to be at this meeting.
00:04:24
Speaker
So in a way, the good news is that rates, which are at five and a quarter percent, may not rise.
00:04:30
Speaker
The not so good news is that they're going to stay at that high level for quite some time.
00:04:34
Speaker
Yeah, we think so.
00:04:36
Speaker
I mean, our forecast is that the Bank of England is going to be one of the latest central banks to start cutting.
00:04:41
Speaker
We haven't got cut until Q1 of 2025 compared to Q3, 24 for the Fed and Q4 for the ECB.
00:04:48
Speaker
And that's really because the UK does have higher wage growth and core inflation than those two jurisdictions.
00:04:54
Speaker
And therefore rates will have to stay higher for longer.
00:04:57
Speaker
But, you know, I always say to people, be careful what you wish for, because if rates are coming down very sharply early next year,
00:05:03
Speaker
It could be because something's gone horribly wrong.
00:05:05
Speaker
So in a way, that table mountain picture where rates stay very high, plateau for a long time and come down slowly, is a picture of relatively successful management of this cycle.
00:05:16
Speaker
Now, we talked about the elections before on the podcast, but weak growth, rising unemployment and lower consumer confidence is not a great backdrop going into elections.
00:05:29
Speaker
Does the government have any room for fiscal encouragement going into this?
00:05:33
Speaker
Well, it depends how you look at it, because yes, we're borrowing a huge amount.
00:05:38
Speaker
Borrowing is up on last year.
00:05:40
Speaker
And like you say, all of those factors, you know, suggest fiscal constraints and not least rising bond yields that we've seen in recent weeks and months.
00:05:48
Speaker
However, because we've got high employment, high wage growth and high inflation, the tax take is also coming higher than expected.
00:05:58
Speaker
So although borrowing is up, it's lower than what the Office of Budget Responsibility was expecting it to be.
00:06:04
Speaker
So the government, I think, can say we've got a little bit more room than we thought we had.
00:06:09
Speaker
Now, I don't think they're going to use that in the autumn statement.
00:06:12
Speaker
I think, you know, they'll want to keep their powder dry.
00:06:15
Speaker
Inflation is still too high and they do not want to go out there and
00:06:18
Speaker
and found the flames of that inflation by cutting tax.
00:06:21
Speaker
But come the spring, when we are closer to the next election, hopefully inflation is lower.
00:06:27
Speaker
There may be scope for a bit of fiscal easing there.
00:06:30
Speaker
We'll have to see.
00:06:31
Speaker
Liz, thank you very much for joining us today.
00:06:32
Speaker
Thank you.
US Economic Outlook and Currency Discussion
00:06:37
Speaker
So that's the view from the UK.
00:06:39
Speaker
Let's head across the Atlantic now and speak to Dara Mar, head of FX strategy in the US.
00:06:44
Speaker
The dollar hit its year to date high at the beginning of October.
00:06:48
Speaker
But was this the peak or could it climb higher still?
00:06:51
Speaker
Let's find out from Dara, who's just published his latest edition of his FX tactician.
00:06:56
Speaker
Dara, thank you for joining us on a podcast from New York.
00:06:59
Speaker
Hello, Pierce.
00:07:00
Speaker
So, Dara, I interviewed your colleague, Paul McEl, on the Currency Outlook, but you've just published another one of our regular reports, which is the FX Tactician, which tends to take a slightly shorter term view of currency markets.
00:07:14
Speaker
Paul, when I interviewed him, was obviously talking about the return of the king dollar and our view that the dollar was going to experience a significant period of strength.
00:07:22
Speaker
And that was a good call, but it seems to have paused of late.
00:07:24
Speaker
So what's the short term outlook for the dollar?
00:07:26
Speaker
Yeah, look.
00:07:28
Speaker
Short-term forecasting, you could argue, is trickier.
00:07:30
Speaker
The advantage is you're not going to be as wrong for as long.
00:07:33
Speaker
But look, where is the dollar?
00:07:34
Speaker
It is pausing.
00:07:36
Speaker
The analogy I've used in the report is one of hill climbing or mountain climbing, where you reach a summit, or at least you think it is.
00:07:43
Speaker
And then having got there, you realise, oh no, we've got another lump of walking to do.
00:07:48
Speaker
It feels to me that's where the dollar is in October.
00:07:52
Speaker
It has created this illusion that we've reached the summit.
00:07:54
Speaker
But I think that, you know, and we as a house,
00:07:56
Speaker
think there is further to go.
00:07:58
Speaker
Why is that?
00:07:58
Speaker
Well, it's relatively straightforward.
00:08:01
Speaker
We're still in an environment of US exceptionalism.
00:08:03
Speaker
We've just had GDP growth in the US come out for the third quarter at close to 5%.
00:08:08
Speaker
Europe is stagnating.
00:08:11
Speaker
The Fed may not want to hike again in this cycle, but I think they will be wary about how quickly the market is bringing forward expectations of when that first rate cut might come in 2024.
00:08:23
Speaker
So look, if they push back against that,
00:08:26
Speaker
You've got the US economy still powering ahead.
00:08:29
Speaker
It feels to me, and this obviously dovetails with our more medium term view, that the ingredients are in place for the dollar to retain its lead in G10FX.
00:08:39
Speaker
So let's look at some of the big currency pairs.
00:08:42
Speaker
We had Liz Martins earlier in the podcast talking about the forthcoming Bank of England meeting.
00:08:49
Speaker
Where are we on US dollar sterling or cable as it's referred to?
00:08:54
Speaker
Yeah, look, Sterling faces a number of hurdles, as I'm sure Liz would agree.
00:09:00
Speaker
From our perspective, it's mostly about the growth inflation makes.
00:09:04
Speaker
You've got an economy that's only grown, I think, 0.4% in the last 12 months.
00:09:10
Speaker
I mean, like, what a contrast with what we're seeing in the U.S.,
00:09:13
Speaker
Well, you've still got a central bank that's nervous about inflation, that's divided on whether they should have to hike rates anymore.
00:09:19
Speaker
I mean, our perspective is they may not need to, but look, we have heard some voices there that suggest they will.
00:09:25
Speaker
Now, reflexively, you'd say, oh, well, if they're surprised with the hike, that'll be bullish to the currency, but not if you're scared about what that extra interest rate burden will mean for the UK economy, for consumers, et cetera.
00:09:37
Speaker
So there's this ambiguity around sterling the dollar doesn't face, you know, and
00:09:42
Speaker
This is the growth inflation mix in the UK is just unhelpful for that currency.
Global Currency Insights
00:09:48
Speaker
Another currency pair that's making the headlines at the moment, because I think it's sort of crossed a key sort of level, was for the yen versus the dollar.
00:09:58
Speaker
Where are we on that?
00:09:59
Speaker
Yeah, look, it's 150 has been a big focus point around dollar yen.
00:10:06
Speaker
And as you say, we've just nudged above it.
00:10:08
Speaker
I think what's been interesting is we haven't, having nudged above it, we haven't suddenly accelerated higher.
00:10:14
Speaker
And that reflects, you know, a big part of the equation for dollar-yen over the last few months, which is the growing threat of intervention from the Japanese side of the equation to prevent, to their mind, excessive yen weakness.
00:10:26
Speaker
Now, it feels as though the mere threat of that kept dollar-yen below 150 for a long time, even as U.S. yields were rising.
00:10:34
Speaker
We've just nudged above it, but I suspect that fear factor is still in play because, as I just said, we haven't accelerated it higher.
00:10:42
Speaker
So, look, we'll see how it plays out.
00:10:44
Speaker
Our view is that Dolly-Yen pretty much trundles sideways.
00:10:48
Speaker
There's a genuine and justifiable fear of the MOF, but at the same time, I think any dips that intervention might foster, if they are delivered, would be quickly seized upon by a market that, to my mind, still really, really likes the U.S. dollar.
00:11:03
Speaker
Sort of moving across the world, one of the economies that has disappointed in terms of its recoveries is China.
00:11:10
Speaker
Has that been a factor undermining the Aussie dollar?
00:11:13
Speaker
Yeah, it's been part of the equation.
00:11:15
Speaker
The difficulty for the Australian dollar is that we have had some local news that could have been arguably supportive.
00:11:22
Speaker
A little bit higher on the inflation front, an RBA, central bank governor, suggesting that they're open to the idea of another rate hike if inflation warrants it.
00:11:31
Speaker
But always there's this headwind coming from China economic disappointments, which remain not particularly catastrophic, but they're just not particularly helpful either.
00:11:41
Speaker
And so we're always kind of waiting for the next thing, the next big policy stimulus and the Aussie dollar still waiting.
00:11:47
Speaker
And
00:11:48
Speaker
But at the same time, it's not a currency that's crumbling or falling off a cliff.
00:11:52
Speaker
So there clearly is out there recognition of the local rate story and the potential for better things to come.
00:12:00
Speaker
But we're cautious.
00:12:01
Speaker
And then finally, the Swiss franc, which has traditionally been a safe haven currency.
00:12:08
Speaker
Is that proving to be the case in the current environment of significant geopolitical volatility?
00:12:13
Speaker
Yeah, look, it's been, I think, the best performing currency in G10 over the last month, the
00:12:18
Speaker
Even if we extend the comparison globally across all currencies, only gold has really outperformed it.
00:12:25
Speaker
So it seems to be a safe haven.
00:12:29
Speaker
That's what the price action would say.
00:12:31
Speaker
The reason I'm slightly hesitant is because it does also appear as though their central bank has been quite a fan of their own currency and they've been buying it a lot during the third quarter.
00:12:42
Speaker
It's to be assumed that that might have continued into October.
00:12:45
Speaker
We'll get the hard date on that at the beginning of November.
00:12:49
Speaker
But I think that's been part of it.
00:12:51
Speaker
You know, the SMB does not want their currency to weaken because they don't want to get inflation.
00:12:56
Speaker
They didn't raise rates in September.
00:12:57
Speaker
So I think they may be of the view that let's make the currency do some of the inflation fighting rather than rates.
00:13:04
Speaker
So safe haven for sure.
00:13:06
Speaker
But yeah, getting a helping hand, I suspect.
00:13:09
Speaker
Well, thank you, Darren.
00:13:10
Speaker
Good luck with climbing that mountain.
00:13:12
Speaker
And thank you for joining us.
00:13:13
Speaker
Thanks very much.
HSBC Global Research and Eurozone Insights
00:13:18
Speaker
Let's take a look at some of the other key reports published by the Global Research Team this week.
00:13:22
Speaker
Sterling worked by our senior European economist, Fabio Balboni, who's analysed all of the 2024 draft budget plans submitted recently by the Eurozone countries to the European Commission.
00:13:33
Speaker
Overall, Fabio expects the fiscal stance to be broadly neutral, while deficits remain high for several countries.
00:13:40
Speaker
In fact, the plans point to very little in the way of measures to reduce debt, something which is likely to leave the ECB disappointed.
00:13:48
Speaker
And talking of the ECB, Europe's central bank kept rates on hold at 4% at its latest meeting, as expected by our team.
00:13:55
Speaker
We touched on Australia with Dara, where the latest inflation number surprised to the upside.
00:14:00
Speaker
Inflation is falling, but more slowly than the Reserve Bank of Australia had expected.
00:14:05
Speaker
Paul Bloxham, our Chief Economist for Australia and New Zealand, and Global Commodities, thinks the door is open for a rate hike at the RBA's November meeting and expects a 25 basis point rise to 4.35%.
00:14:20
Speaker
And finally, regular followers of our research will know that we have a particular focus on nine key themes, ranging from disruptive technology to digital finance to the future consumer.
00:14:31
Speaker
And we've just published our latest edition of Talking Points, where we wrap up all of our latest research on these topics.
00:14:38
Speaker
This month, we put the spotlight on Indonesia, initiate on major U.S. payments, travel and ledger companies, identify stocks to play the energy transition theme, and look ahead to COP28 climate talks.
00:14:50
Speaker
If you'd like to know more about those reports, please email askresearch at hsbc.com.
Podcast Closing
00:14:59
Speaker
So that's all from us.
00:15:00
Speaker
Don't forget to follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for the Macro Brief.
00:15:07
Speaker
Thanks very much for listening.
00:15:08
Speaker
We'll be back next week.
00:15:11
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:15:14
Speaker
We hope you enjoyed the discussion.
00:15:16
Speaker
Make sure you're subscribed to stay up to date with new episodes.