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.
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Speaker: And now onto today's show.
Speaker: The following podcast was recorded on the 26th of October, 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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.
Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to the Macrobrief.
Speaker: We've got a bit of a mixture of content for you this week.
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.
Speaker: But first, we're focusing on events here in the U.K.
Speaker: The Bank of England is meeting on the 2nd of November.
Speaker: And I'm joined in the studio by Liz Martins, senior U.K.
Speaker: economist, to take a look at recent macro data and what its likely impact is on any rate decision.
Speaker: Liz, welcome to the podcast.
Speaker: Thank you.
Speaker: Good to have you back.
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.
Speaker: One was labour market data, which was experimental.
Speaker: Can you sort of explain?
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.
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.
Speaker: And in the meantime, we just have to be happy with this kind of imperfect solution.
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
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.
Speaker: But if you're applying the correct rate of change to the wrong starting point, you're still none the wiser.
Speaker: So basically there's a cloud of uncertainty over how high or low unemployment really is in the UK.
Speaker: So if you were to sort of hazard a guess, what would you say is a trend in unemployment currently?
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.
Speaker: It's nowhere near as tight as it was kind of a year ago.
Speaker: It's easier to hire than it was.
Speaker: And some companies talking about reducing headcount, maybe more through attrition.
Speaker: rather than outright redundancies, but certainly a looser labour market.
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?
Speaker: Now the other bit of macro data that we've had is the UK PMI for October.
Speaker: First you remind us what that measures and then what was the reading?
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?
Speaker: Simple as that.
Speaker: And it's just a survey of growth.
Speaker: Unfortunately, it's not showing us any growth in the UK this time around because all three sectors are below 50.
Speaker: So indicating contraction.
Speaker: Services only just below, so not terrible.
Speaker: Manufacturing some way below, unfortunately.
Speaker: So putting that together, the consensus seems to be that the Bank of England is going to leave its rate unchanged.
Speaker: Is that our view?
Speaker: Yeah, it is our view.
Speaker: So obviously we've still got too high inflation.
Speaker: Wage growth is not consistent.
Speaker: It's still too high to be consistent with the inflation target.
Speaker: It's coming down slowly, but it is coming down.
Speaker: And then you add in all those red lights flashing like the weaker PMIs, like a fall in consumer confidence.
Speaker: And we think the BOE probably is happy to at least pause from here.
Speaker: So we don't expect a rate rise in November.
Speaker: I don't think any of our counterparts do or the markets or anyone really.
Speaker: There's a sense that the BOE may not quite be done.
Speaker: Rates may have to rise again, but it's not going to be at this meeting.
Speaker: So in a way, the good news is that rates, which are at five and a quarter percent, may not rise.
Speaker: The not so good news is that they're going to stay at that high level for quite some time.
Speaker: Yeah, we think so.
Speaker: I mean, our forecast is that the Bank of England is going to be one of the latest central banks to start cutting.
Speaker: We haven't got cut until Q1 of 2025 compared to Q3, 24 for the Fed and Q4 for the ECB.
Speaker: And that's really because the UK does have higher wage growth and core inflation than those two jurisdictions.
Speaker: And therefore rates will have to stay higher for longer.
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,
Speaker: It could be because something's gone horribly wrong.
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.
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.
Speaker: Does the government have any room for fiscal encouragement going into this?
Speaker: Well, it depends how you look at it, because yes, we're borrowing a huge amount.
Speaker: Borrowing is up on last year.
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.
Speaker: However, because we've got high employment, high wage growth and high inflation, the tax take is also coming higher than expected.
Speaker: So although borrowing is up, it's lower than what the Office of Budget Responsibility was expecting it to be.
Speaker: So the government, I think, can say we've got a little bit more room than we thought we had.
Speaker: Now, I don't think they're going to use that in the autumn statement.
Speaker: I think, you know, they'll want to keep their powder dry.
Speaker: Inflation is still too high and they do not want to go out there and
Speaker: and found the flames of that inflation by cutting tax.
Speaker: But come the spring, when we are closer to the next election, hopefully inflation is lower.
Speaker: There may be scope for a bit of fiscal easing there.
Speaker: We'll have to see.
Speaker: Liz, thank you very much for joining us today.
Speaker: Thank you.
Speaker: So that's the view from the UK.
Speaker: Let's head across the Atlantic now and speak to Dara Mar, head of FX strategy in the US.
Speaker: The dollar hit its year to date high at the beginning of October.
Speaker: But was this the peak or could it climb higher still?
Speaker: Let's find out from Dara, who's just published his latest edition of his FX tactician.
Speaker: Dara, thank you for joining us on a podcast from New York.
Speaker: Hello, Pierce.
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.
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.
Speaker: And that was a good call, but it seems to have paused of late.
Speaker: So what's the short term outlook for the dollar?
Speaker: Yeah, look.
Speaker: Short-term forecasting, you could argue, is trickier.
Speaker: The advantage is you're not going to be as wrong for as long.
Speaker: But look, where is the dollar?
Speaker: It is pausing.
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.
Speaker: And then having got there, you realise, oh no, we've got another lump of walking to do.
Speaker: It feels to me that's where the dollar is in October.
Speaker: It has created this illusion that we've reached the summit.
Speaker: But I think that, you know, and we as a house,
Speaker: think there is further to go.
Speaker: Why is that?
Speaker: Well, it's relatively straightforward.
Speaker: We're still in an environment of US exceptionalism.
Speaker: We've just had GDP growth in the US come out for the third quarter at close to 5%.
Speaker: Europe is stagnating.
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.
Speaker: So look, if they push back against that,
Speaker: You've got the US economy still powering ahead.
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.
Speaker: So let's look at some of the big currency pairs.
Speaker: We had Liz Martins earlier in the podcast talking about the forthcoming Bank of England meeting.
Speaker: Where are we on US dollar sterling or cable as it's referred to?
Speaker: Yeah, look, Sterling faces a number of hurdles, as I'm sure Liz would agree.
Speaker: From our perspective, it's mostly about the growth inflation makes.
Speaker: You've got an economy that's only grown, I think, 0.4% in the last 12 months.
Speaker: I mean, like, what a contrast with what we're seeing in the U.S.,
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.
Speaker: I mean, our perspective is they may not need to, but look, we have heard some voices there that suggest they will.
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.
Speaker: So there's this ambiguity around sterling the dollar doesn't face, you know, and
Speaker: This is the growth inflation mix in the UK is just unhelpful for that currency.
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.
Speaker: Where are we on that?
Speaker: Yeah, look, it's 150 has been a big focus point around dollar yen.
Speaker: And as you say, we've just nudged above it.
Speaker: I think what's been interesting is we haven't, having nudged above it, we haven't suddenly accelerated higher.
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.
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.
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.
Speaker: So, look, we'll see how it plays out.
Speaker: Our view is that Dolly-Yen pretty much trundles sideways.
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.
Speaker: Sort of moving across the world, one of the economies that has disappointed in terms of its recoveries is China.
Speaker: Has that been a factor undermining the Aussie dollar?
Speaker: Yeah, it's been part of the equation.
Speaker: The difficulty for the Australian dollar is that we have had some local news that could have been arguably supportive.
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.
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.
Speaker: And so we're always kind of waiting for the next thing, the next big policy stimulus and the Aussie dollar still waiting.
Speaker: And
Speaker: But at the same time, it's not a currency that's crumbling or falling off a cliff.
Speaker: So there clearly is out there recognition of the local rate story and the potential for better things to come.
Speaker: But we're cautious.
Speaker: And then finally, the Swiss franc, which has traditionally been a safe haven currency.
Speaker: Is that proving to be the case in the current environment of significant geopolitical volatility?
Speaker: Yeah, look, it's been, I think, the best performing currency in G10 over the last month, the
Speaker: Even if we extend the comparison globally across all currencies, only gold has really outperformed it.
Speaker: So it seems to be a safe haven.
Speaker: That's what the price action would say.
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.
Speaker: It's to be assumed that that might have continued into October.
Speaker: We'll get the hard date on that at the beginning of November.
Speaker: But I think that's been part of it.
Speaker: You know, the SMB does not want their currency to weaken because they don't want to get inflation.
Speaker: They didn't raise rates in September.
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.
Speaker: So safe haven for sure.
Speaker: But yeah, getting a helping hand, I suspect.
Speaker: Well, thank you, Darren.
Speaker: Good luck with climbing that mountain.
Speaker: And thank you for joining us.
Speaker: Thanks very much.
Speaker: Let's take a look at some of the other key reports published by the Global Research Team this week.
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.
Speaker: Overall, Fabio expects the fiscal stance to be broadly neutral, while deficits remain high for several countries.
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.
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.
Speaker: We touched on Australia with Dara, where the latest inflation number surprised to the upside.
Speaker: Inflation is falling, but more slowly than the Reserve Bank of Australia had expected.
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%.
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.
Speaker: And we've just published our latest edition of Talking Points, where we wrap up all of our latest research on these topics.
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.
Speaker: If you'd like to know more about those reports, please email askresearch at hsbc.com.
Speaker: So that's all from us.
Speaker: Don't forget to follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for the Macro Brief.
Speaker: Thanks very much for listening.
Speaker: We'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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