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 for publication on the 27th of April 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: Hello, I'm P.S.
Speaker: Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: Coming up on today's programme, we assess the state of the UK economy as the country prepares for the coronation of King Charles III.
Speaker: We find out why the US dollar could weaken more than some people think.
Speaker: And we look at what a surprise cut to oil supply by the members of OPEC means for the oil price.
Speaker: We begin this week here in London, where on the 6th of May, Westminster Abbey will host the coronation of King Charles III.
Speaker: To mark the occasion, our teams from across the asset classes have been assessing the state of the UK's economy and markets.
Speaker: Simon Wells, Chief European Economist, joins us now.
Speaker: Simon, welcome to the podcast.
Speaker: Hi.
Speaker: So we're entering what is referred to as a new Carolian era.
Speaker: I had to look it up.
Speaker: That comes from Carolus, which is the Latin for Charles.
Speaker: The last Carolian era was in the 17th century and started with a restoration rally.
Speaker: That's right.
Speaker: After the nation's brief foray as a republic, people were very happy to be able to go out and spend again after austerity years.
Speaker: So there was quite the GDP rally starting in 1660.
Speaker: However, unsurprisingly, perhaps a combination of invasion, plague and the Great Fire of London somewhat snuffed out this restoration rally.
Speaker: And while things aren't quite as eventful now, you can see some parallels in terms of disease and political strife.
Speaker: So we're not anticipating a restoration rally this time around, but it's fair to say that the UK economy is exhibiting quite a bit of resilience.
Speaker: In fact, the sentiment indicators have all, both on the consumer and the business side, recovered meaningfully.
Speaker: Yes, that's right.
Speaker: There has been a lot of resilience when you consider the size of the inflationary income squeeze that households and businesses are facing.
Speaker: In fact, you may recall that back in February, we wrote a piece called Will the British Lion Roar Again?
Speaker: And we're pretty much going along what was our upside demand scenario there.
Speaker: So things
Speaker: really have gone about as well as we thought they might.
Speaker: As you say, PMIs pointing to expansion, particularly, of course, in the service sector.
Speaker: Consumer confidence, it remains low, but it is rising.
Speaker: Back in the 17th century, it was the plague.
Speaker: The plague here, I suppose, is the fact that the inflation is still problematic.
Speaker: And with this recovering consumer sentiment, isn't it going to be more difficult to put the inflation genie back in the bottle?
Speaker: Well, potentially, yes.
Speaker: And recent data for the UK, particularly on the inflation side and the labour market side, have been quite hawkish.
Speaker: And that's why we recently added two 25 basis point rate rises to our view for the Bank of England.
Speaker: It could make inflation more sticky and it could add upside risks to interest rates as well.
Speaker: So there's always a bit of bad news in the good news.
Speaker: So really that translates into an income squeeze.
Speaker: But I'm really interested by this reference in your report to the British capability of smoothing through.
Speaker: Well, yes, that's right.
Speaker: Quite often when you see real terms incomes fall in the UK, the British consumer is very willing either to borrow a little bit more or run down a little bit of savings in order to maintain the spending and consumption that they are targeting.
Speaker: So for those that can afford to do so, it appears they are doing so.
Speaker: And that has been one major support to the economy recently.
Speaker: What about the property market, particularly as we're seeing a whole bunch of fixed rate mortgages coming up for a renewal?
Speaker: Well, for any homeowner that is renewing or coming off a five-year fixed rate, yes, of course, that is a big and material hit to disposable income on top of what's going on in energy, food and other parts of inflation.
Speaker: But the property market is clearly one place where rises in interest rates, monetary tightening has really revealed itself.
Speaker: And so...
Speaker: Perhaps against some of the more bullish parts of this report, the property sector is still pretty vulnerable.
Speaker: But even here, the section on house builders suggests that things are bad, but potentially we're turning the corner and even there, there are some signs of light.
Speaker: So can we say as we count down to the coronation that the British lion is not roaring yet, but can hold its head high?
Speaker: I think we can.
Speaker: As I said, I think the economy has been remarkably resilient in the face of this income shock.
Speaker: We must, however, be realistic.
Speaker: The income shock is ongoing.
Speaker: Real terms incomes aren't really going to start to grow for a few quarters yet.
Speaker: Yes, the head is held high, but we shouldn't underestimate some of the challenges.
Speaker: Simon, thank you very much for joining us.
Speaker: Thank you.
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Speaker: We turn our attention now to the FX markets and the outlook for the dollar.
Speaker: It's been HSBC's view for some time that the greenback will weaken, but how much further does it have to fall?
Speaker: Dara Ma, head of FX strategy in the US, is here to explain.
Speaker: So Dara, let's start by just talking through the key drivers of the dollar.
Speaker: Sure.
Speaker: Well, look, our view on the dollar is that it's going to weaken into the second half this year, perhaps in the near term in a grinding fashion rather than a swift descent.
Speaker: To be fair, the drivers haven't changed a great deal over the last year and a half.
Speaker: It's the relative dominance of the drivers.
Speaker: So what are those drivers?
Speaker: Well,
Speaker: risk appetite.
Speaker: The dollar is a safe haven, so it's clearly determined by that.
Speaker: And the banking sector angst and the to and fro on the headlines and that has been a key driver of late and will potentially remain a key driver
Speaker: depending how that evolves.
Speaker: Relative interest rates, always critical to currencies.
Speaker: And of course, what we're seeing now is central bank tightening cycles, maturing or getting to the end of the cycle, if you like.
Speaker: And obviously we have the Fed next week in that context where we're expecting another 25 basis point hike.
Speaker: So rate differentials also critical, but it feels like the dollar's rate tightening cycle, I'll say becoming mature and therefore less supportive for the dollar going forward.
Speaker: And then we got other sidebar issues, at least sidebar for now, which are things like the US debt ceiling, which I suspect will become a bigger focus in the weeks to come.
Speaker: And also, of course, all your global angles.
Speaker: But in sum, we think that if we put them all into kind of a nice cocktail, it points to a softer dollar in the near term, but one that's just grinding lower, as I say, rather than falling swiftly.
Speaker: So, Derek, is the focus very much then domestic drivers and policies or is the international picture also playing a role here in the expectations for dollar weakness?
Speaker: It's a mix of both.
Speaker: You know, if you rewind the tape to 2022, the entire narrative in currency markets was dictated by what's happening to the dollar, what's happening to Fed rates and risk appetite.
Speaker: It was all about the dollar.
Speaker: Because we're seeing, you know, we're reaching the end of the Fed tightening phase, it's not such a dominant part of the conversation.
Speaker: And it's allowing, if you like, bandwidth for other stories to get traction.
Speaker: And whether that's the, you know, the ECB meeting next week, the debate there about whether they move by 25 or 50 basis points, whether it's the Bank of England, where, you know, prior expectations that perhaps rates had reached their peak have been set to one side because we've had some hawkish data.
Speaker: a bit more work to be done at the Bank of England, are throwing the net further, you know, looking at the RBA, their polls, the Bank of Canada and its polls.
Speaker: All of these are getting traction in the currency market in a way I think that they wouldn't have done, of course, in 2022, where it's just all about the Fed and all about the dollar.
Speaker: And Dara, you mentioned, of course, the policy issues in the US.
Speaker: What about on the data front?
Speaker: Anything you're particularly looking out for in terms of potential dollar impact?
Speaker: Yeah, I think there's still a debate being hammered out in the market.
Speaker: At the one end of the equation, it's whether the US is destined for a hard landing.
Speaker: You know, the whole recession scenario that people want to weave into their story, if that were true, of course, it would play as a dollar bowl environment.
Speaker: We would argue, in fact, that the pretty elevated level of the dollar currently would suggest that
Speaker: perhaps quite a bit of US recession risk is already in the price of the dollar.
Speaker: But anyway, that's at one end of the spectrum.
Speaker: At the other end is, well, perhaps we can make the bull case for global growth and therefore the bearish case for the dollar, which is the idea that we're seeing recovery.
Speaker: Growth numbers in Europe and in the UK are generally coming in better than expected.
Speaker: Consumer confidence is rebounding.
Speaker: And that frames our bullishness on euro and sterling through the second half this year.
Speaker: And of course, you know, we have the China growth story that their emergence from COVID and zero COVID policies.
Speaker: We're already seeing growth come through.
Speaker: They're quite strong and, you know, prompting perhaps more optimism on that front.
Speaker: So it's happening at the global level, but we still have this debate about are we ultimately going to see a recession because of the lag effects of all this tightening?
Speaker: Are these kind of green shoots of recovery and actually resilience and economic activity?
Speaker: Is that really the narrative for the second half this year?
Speaker: Thanks, Dara.
Speaker: And I'm sure you'll also be keeping a close eye on the inflation data in the US this week.
Speaker: Thanks so much.
Speaker: Thank you very much.
Speaker: We finished this week in the oil markets.
Speaker: Earlier this month, the members of OPEC surprised markets by announcing cuts to supply.
Speaker: AJ Palmer, oil and gas analyst, joins us to explain the implications.
Speaker: AJ, welcome.
Speaker: Thank you.
Speaker: Great to be here.
Speaker: So AJ, what was behind this decision by OPEC and how will it affect the oil markets?
Speaker: So I'd say there were a few reasons behind the OPEC plus cuts.
Speaker: We saw relatively low oil prices in the weeks leading up to the cuts.
Speaker: Brent was trading in the low oil.
Speaker: to mid 70s dollars per barrel region for much of March and the outlook on fundamentals for this quarter was also looking pretty bearish.
Speaker: And so OPEC plus understandably took the decision to cut and rebalance the market.
Speaker: But there are also wider points to note.
Speaker: Oil prices aren't too high to cause a recession and the producer group is no longer concerned about market share as U.S. shale oil growth is much lower now than it has been historically.
Speaker: And so this also gave OPEC Plus the confidence to act as it saw fit.
Speaker: In terms of the impact on the oil markets, we do not expect much of an impact in the very near term, but it certainly will tighten the market in the second half of the year.
Speaker: And what are you seeing on the demand side?
Speaker: So demand is where we would expect it to be for this time of the year.
Speaker: Q1 and really up until around early to mid-May is generally the seasonal lull in oil demand in the West.
Speaker: And combined with the general economic backdrop, European and US oil demand is lower year on year, but still in line with what we would expect given all of those factors that we just mentioned.
Speaker: India's oil demand is racing ahead.
Speaker: We've been bullish on India's oil demand outlook for quite some time now.
Speaker: The other big question is of course China.
Speaker: I would say the data on China is fairly mixed right now, but I would say let's wait and see as more data comes through.
Speaker: What other factors do you see driving the oil price?
Speaker: I'd say in the near term, I think it really is a story about wider macroeconomic concerns.
Speaker: What is the outlook for the global economy?
Speaker: When will this interest rate hiking cycle end?
Speaker: Those wider questions will likely drive the oil price in the coming months.
Speaker: And then as we get to the summer, we think the market discourse will return to focusing on oil market fundamentals.
Speaker: Deep OPEC plus cuts and expected higher oil demand from China really should lead to a deficit in the oil market, which should drive prices into H23.
Speaker: And AJ, just on those prices, where do you see them going from here?
Speaker: So in the near term, those macroeconomic factors, I think, really will keep a lid on oil prices.
Speaker: We've seen all of the price gains since the OPEC Plus cuts announcement be fully eroded in the last few days, principally due to those concerns and uncertainties around those economic factors.
Speaker: But once we get into the summer, I think strong summer driving season in the West, higher Chinese oil demand and cuts from OPEC Plus,
Speaker: should lead to those tighter fundamentals.
Speaker: And as such, we expect prices to move higher in the second half of the year.
Speaker: AJ, thanks very much for the update.
Speaker: Thank you.
Speaker: So that's it for another week.
Speaker: Thanks to our guests, Simon Wells, Dara Mar and AJ Palmer.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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