2025-05-12 12:02
Key takeaways The BoE cut rates to 4.25% in May, but a surprise three-way vote split cooled market expectations for future cuts. US-UK trade deal with few details immediately announced; most UK goods exports to the US will still face the 10% tariff. The GBP’s reaction was rather muted and is likely to move sideways against the USD in the weeks ahead. The GBP weakened slightly against the USD after the announcement of a US-UK trade deal, erasing an early gain amid the Bank of England’s (BoE) hawkish cut. Unlike the Federal Reserve (Fed) that paused rate cuts for a third straight meeting, the BoE decided to lower its key policy rate by 25bp to 4.25% on 8 May. The decision came in line with market expectations, but the vote dividing the 9-member monetary policy committee (MPC) into three groups was a surprise. Five of them voted for the move, while two preferred a larger 50bp reduction and another two voted to hold rates steady. The BoE did not change its forward guidance, reiterating “a gradual and careful approach to the further withdrawal of monetary policy restraint”. The UK central bank now sees slightly weaker inflation but stronger near-term growth. Its growth forecast for this year was raised to 1% (from its February projection of 0.7%) and that for next year was lowered to 1.25% (from 1.5%), while the outlook for 2027 was unchanged at 1.5%. However, with two MPC votes for a hold and no change to the BoE guidance, the tone was a little more hawkish than expected. The GBP strengthened modestly against the USD, as markets pared some rate cut expectations (and more so after the US-UK trade deal), currently seeing only two more 25bp BoE cuts this year (Bloomberg, 9 May 2025). As for the US-UK trade deal, which US President Trump noted will be “the first of many”, its benefit and scope appear to be rather limited, with few details immediately announced. Most UK goods exports to the US will still face the 10% tariff, compared to an average tariff of 2.2% previously. For now, the trade deal includes lower US tariffs on British steel and aluminium, from 25% to zero. Other benefits include lowering the tariff on British-made cars to 10% from 27.5%, but only for the first 100,000 cars entering the US. New reciprocal market access is granted on beef, which gives UK farmers a tariff free quota for 13,000 metric tonnes and the UK removed a tariff on ethanol entering the UK from the US. There are other elements that may benefit the UK aerospace and pharmaceutical sectors, in addition to some promises to ease some non-tariff barriers with more mutual investment, but details are limited, and discussions ongoing. On a positive note, the trade framework removes some uncertainty surrounding future trade relations between the two countries which should support business investment sentiment. But until other regions, especially the EU and China, conclude their negotiations, it will be difficult to judge the deal in isolation. The GBP sees muted reaction to the trade framework with the US. Part of the explanation is that the USD is capitalising on signs that US trade policy uncertainty is declining, thereby overshadowing the relief from a trade deal that might offer to the US economic outlook. It is also possible that the GBP is being hit by other domestic headlines, with the National Institute of Economic and Social Research (NIESR) pointing to UK fiscal policy headaches ahead (Bloomberg, 8 May 2025). All things considered, the GBP is likely to move sideways against the USD in the weeks ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-boes-cut-in-a-3-way-split-and-us-uk-trade-deal/
2025-05-12 07:04
Key takeaways Recent weakness in the US dollar has been down to worries over US growth, high deficits, and an end of US exceptionalism. But it’s no secret that the US is keen on a weaker USD to improve trade competitiveness. Mexico’s growth engine is stuttering amid high policy uncertainty, with a slowing US economy adding to headwinds. But the good news is that these growth risks, combined with inflation consolidating below 4%, mean Banxico looks set to maintain its easing stance. Japanese equities have beaten global markets by 5 percentage points in USD terms year-to-date, but they’ve lagged by 30 percentage points over the past decade (MSCI Japan vs ACWI). Nonetheless, at Warren Buffet’s 60th and final Berkshire Hathaway AGM as CEO, he reiterated how much he likes them. Chart of the week – Stocks since ‘Liberation Day’ It took five weeks, but US stocks have finally recovered from the global market sell-off sparked by the ‘Liberation Day’ tariff proposals in early April. The relief rally has played out amid falling volatility, still-high valuations and profits expectations, tighter credit spreads, and a sense of calm in Treasury bonds. Put together, it suggests that recession isn’t priced anywhere in investment markets right now. But policy uncertainty remains ultra-high, and the July deadline to restore reciprocal tariffs still looms. So, what has driven this rebound? For a start, US economic momentum at the beginning of the year was strong. Facts about the labour market and profits – including a solid Q1 earnings season – remain good. There’s been some growth cooling, but nothing more than that – at its May meeting, the Fed concluded “economic activity has continued to expand at a solid pace”. Meanwhile, there’s a sense on global trade that we’re moving from ‘tariff escalation’ to negotiation. A more dovish tone from US leaders has helped, and constructive talks between China and the US could be a further boost for markets. Last week saw US-UK and UK-India trade agreements, and there have been accelerated talks between China, Japan, and South Korea. But despite signs of progress on trade, there is still cause for concern. In the soft data, US consumer and business confidence has fallen sharply in the face of uncertainty. And it could be that lagging hard data will eventually “catch down” with weak survey data in the coming months. While markets have rebounded, the underperformance of the US versus EAFE regions in Asia (particularly India and Japan), Europe, and Emerging Markets, reflects a ‘wait-and-see’ stance by investors and the ongoing risk that policy uncertainty could provoke further volatility. Market Spotlight An investment (h)edge Amid the recent pick-up in market volatility, traditional diversification strategies have not proved reliable, with stock-bond correlations going haywire at times. But one asset class proving resilient is hedge funds. A recent review by some alternatives specialists shows that typical balanced hedge fund portfolios have insulated against as much as 90% of recent market weakness. As expected, some hedge fund strategies have been well-suited to the conditions. Equity market neutral strategies in particular, tend to benefit from volatility, and they have performed well. Macro fund managers have also enjoyed some success, especially in trading rates and commodity markets. But net-long and long/short equity market strategies have faced a tougher test given the weakness in US stocks, and their performance has retraced sharply. Given that recent volatility has been partly driven by policy uncertainty, some investment specialists expect further volatility to come. Indeed, allocators may need to lean ever more heavily on their hedge fund portfolios in the coming years to maximise returns. For Q2, the environment remains tricky for many strategies, but some specialists are most positive on ‘equity market neutral long/short’ and ‘multi-strategy multi-portfolio manager’ funds. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg. Data as at 7.30am UK time 09 May 2025. Lens on… Plaza 2.0 by stealth Recent weakness in the US dollar has been down to worries over US growth, high deficits, and an end of US exceptionalism. But it’s no secret that the US is keen on a weaker USD to improve trade competitiveness. Back in the 1980s, it did it with the ‘Plaza accord’, a multilateral deal to weaken its currency. While a similar ‘Mar-a-Lago accord’ might not be achievable now, countries with large external surpluses might let their FX rates strengthen against the USD to smooth the way for new trade deals. Persistent surpluses lead to what’s known as large positive net international investment positions (NIIP) – a measure of an economy’s net external wealth. And Asian majors like Japan, mainland China, Taiwan, and South Korea have outsized NIIPs, which over time should put upward pressure on their currencies. But many Asian currencies have actually been weakening in recent years. The largest ever single-day gain in the Taiwanese dollar earlier last week may not be a policy-driven move. But the timing and the size of it have led to speculation about what it might mean more broadly for other external-surplus currencies. Could significant appreciation in the likes of JPY and KRW be the next big moves in FX? Mexico as a safe harbour? Mexico’s growth engine is stuttering amid high policy uncertainty, with a slowing US economy adding to headwinds. The previous week’s Q1 GDP data just eked out positive growth, after a big contraction in the prior quarter. But the good news is that these growth risks, combined with inflation consolidating below 4%, mean Banxico looks set to maintain its easing stance. The market is pricing in over 1.75% of cuts over the next year. Despite this, the Mexican peso has done relatively well against the US dollar this year, helping to cap inflation. This reflects Mexico’s robust macro fundamentals – including healthy fiscal and external balances, and FDI inflows amid nearshoring (which may speed up as firms leave China). And for those worried about tariffs, it should be remembered a big component of Mexico’s exports to the US are covered by the USMCA treaty, with negotiations underway to reduce the 25% rate for non-USCMA compliant goods. Some Mexico City-based analysts think the combination of a limited tariff impact, high real yields, significant rate cuts, and a widening domestic investor base set the stage for further strong performance of local currency government bonds. Still a Buffet favourite April saw oil prices dip below USD60/bbl for the first time since early 2021. This has come amid increasing concerns over the global demand outlook on the back of trade tensions, and some weaker US data. But OPEC+ policymaking has been a decisive factor. The cartel surprised investors in early April by announcing plans to significantly boost headline output in May. There is now speculation there could be an even higher output target for June, set to be decided next Monday. Why would OPEC+ do this now? The simple reason is that Saudi Arabia is frustrated with rising levels of non-compliance among members – with countries such as Iraq, Kazakhstan, and the UAE pumping well above their quotas. Perhaps the pain associated with a further fall in prices will force future discipline. It’s a risky strategy. But the implication is much lower oil prices than we have been used to in recent years. Just as 2025 inflation forecasts are being upgraded, the supply shock is welcome news for Western economies and major emerging markets such as India and China. And with inflation expectations closely tied to oil prices, the Fed has a bit more breathing space to cut rates. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, IMF, IFS, MSCI, Datastream. Data as at 7.30am UK time 09 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 09 May 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Market review Risk appetite improved amid rising optimism for a de-escalation in global trade tensions. The US dollar was stable against a basket of major currencies. US Treasury yields rose modestly after some solid economic data, including ISM services and jobless claims figures. The Fed left rates unchanged, with Chair Powell emphasising that policy remains well positioned to respond when there is further clarity how the economy evolves, while noting risks of higher unemployment and inflation. Meanwhile, the Bank of England lowered rates by 0.25%. In equity markets, US stocks traded sideways following rallies in the prior two weeks. The Euro Stoxx 50 was largely unchanged amid mixed Q1 earnings, while Japan’s Nikkei 225 gained in a holiday shortened week. Other Asian markets were broadly higher, with a new round of Chinese policy stimulus bolstering the Shanghai Composite and Hang Seng, whereas India’s Sensex softened on geopolitical uncertainties. In commodities, oil prices rebounded, and gold posted decent gains in a volatile week. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/stocks-since-liberation-day/
2025-05-08 12:02
Key takeaways Sentiment in the UK plummets in an ‘awful April’ for the UK economy… …as global uncertainty is compounded by a flurry of domestic challenges for businesses, households, and the government. But there are green shoots of positivity including lower interest rates. Source: HSBC Uncertainty seems to be the only certainty The world continues to be gripped by US tariff policy and what it could mean for the global economy, but with so many questions still unanswered, uncertainty remains the dominant theme. A delay in the imposition of reciprocal tariffs until 9 July offers some hope that trade deals can be reached. Regardless of their outcome, US President Trump has made tariffs central to his presidency and therefore a full reversal of recent announcements seems unlikely. In the meantime, as economic data becomes available, it is increasingly clear that uncertainty alone coupled with a global slowdown may be the greater drag on UK growth than the tariffs themselves. The UK PMI survey for April reported its first monthly contraction in the UK economy since October 2023. External demand declined at its fastest rate since 2009 and confidence in future output growth fell to its lowest level in two and a half years (chart 1). Sentiment is currently comparable to other periods of significant uncertainty – the pandemic, the EU referendum, and the 2008 global financial crisis (GFC). Indeed, we have revised down our growth forecast for 2026, reflecting the weaker global backdrop, loss of confidence, and subsequent lower investment. Awful April April also marked an eventful month domestically. Data confirmed that the government overshot borrowing expectations in 2024/25. House prices fell 0.6% m-o-m in April as stamp duty thresholds were lowered. Businesses faced the long-awaited increase in employer’s national insurance contributions (NIC) and national living wage (NLW) amongst other input price rises. Meanwhile, households faced a broad based rise in the cost of living, including high water bills, energy prices, and council tax rises. Moreover, the median household disposable income was broadly unchanged in 2024 versus 2023. It is no surprise then that consumer confidence remains weak, particularly across lower income households (chart 2). It’s not all bad news More positively, beyond US policy, the UK is positioned to take advantage of opportunities globally from strong growth in the Middle East, to a trade deal with India, and continued discussions with the EU. While domestically, even without the rise in the NLW, earnings continue to rise in real terms and the labour market, despite the headwinds, is resilient. That is not to say it has not deteriorated: while surveys point to employment growth stalemate, notices of potential redundancies are within normal ranges. Consumer demand had been picking up in the first quarter, retail sales volumes increased 1.6% q-o-q, its best performance since 2021. Lower interest rates would also help businesses, households, and the government. Members of the Monetary Policy Committee have appeared more concerned with the new downside risks to growth and have noted the disinflationary effects from US tariffs (source: Megan Greene, Bloomberg TV, 22 April 2025) and associated declines in oil and gas prices. In our view, the Bank of England will continue its ‘steady as she goes’ cutting cycle throughout 2025, assuming that the global backdrop avoids a larger shock and recession. Domestic inflationary pressures are more acute, and although we expect the recent pick up in services price momentum to be temporary (chart 3), it remains too high to be consistent with the 2% inflation target over the medium term. We maintain our view that the Bank Rate will end 2025 at 3.75%. Source: Macrobond, S&P Global, HSBC Source: GfK, HSBC Source: Macrobond, ONS, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/uncertainty-weighing-on-growth/
2025-05-08 12:02
Key takeaways The Fed held rates steady for a third time in May and flagged even higher uncertainty about the economic outlook. The USD was modestly stronger after the meeting, with DXY hovering around the 100 level. We see the USD delinked from rate differentials for now amid US trade policy uncertainty. For a third straight meeting in May, the Federal Open Market Committee (FOMC) voted to keep the federal funds target range unchanged at 4.25-4.50%. This was in line with market expectations. In its policy statement, the FOMC noted that uncertainty about the economic outlook “has increased further”, and added “the risks of higher unemployment and higher inflation have risen,” a new sentiment that was absent from the policy statement issued in March. In the press conference, the Federal Reserve (Fed) Chair, Jerome Powell, said that the tariffs announced on 2 April were “substantially larger than anticipated” in earlier forecasts. That said, the Fed chair also repeatedly argued that the Fed is in no hurry to alter policy, and that policymakers are in a good place to wait and see. Even with a likely deterioration in the future growth-inflation trade-off in the US economy, our economists still expect the Fed to deliver no more than 75bp of rate cuts through 2025 and 2026. The three 25bp rate cuts would probably be delivered this year, in June, September, and December. However, if US job data for May (6 June) does not show evidence of softening (in the unemployment rate, net employment growth, or both), then the clear risk to our economists’ forecast is that the FOMC may keep policy rates unchanged again at its 17-18 June meeting. Markets currently see a 1-in-5 chance of a 25bp cut in June, and price in a c80% chance of this to happen in July (Bloomberg, 8 May 2025). Source: Bloomberg, HSBC FX markets did not learn a great deal new from the May FOMC meeting, leaving the USD only modestly stronger, with the US Dollar Index (DXY) hovering around 100,perhaps because Fed Chair Powell did not hint at an appetite for swift easing. In any event, interest rate differentials no longer enjoy a monopoly grip over the USD (see the chart above), with its value currently determined by political and structural factors. We expect these will keep the USD on the defensive in the months ahead. Still, the conventional drivers of monetary policy, i.e., cyclical drivers, could see their relevance resurrected if US trade policy uncertainty declines alongside possible trade deals and clarity on tariff levels. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-fed-pauses-rate-cuts-for-a-third-time/
2025-05-08 12:02
Key takeaways As expected, the Federal Reserve kept the federal funds rate target range unchanged at 4.25%-4.50%. The FOMC continues to try to balance the recent weaker economic data and the rising risk of recession with concerns surrounding tariffs and the potential for an acceleration in inflation. Even with a likely deterioration in the future growth-inflation trade-off, we continue to expect three 0.25% rate cuts this year, in June, September and December. However, if the May jobs data don’t show evidence of softening (in the unemployment rate, net employment growth, or both), then the FOMC may keep policy rates unchanged again in June. For fixed income investors, despite the potential for some near-term tariff inflation, any back up in market rates continues to provide a tactical opportunity. For US equity investors, the widespread use of tariffs and the potential for accelerating inflation continue to dampen the outlook for corporate profits and economic growth in 2025. The sizable downward revision to corporate profits should incorporate any potential slowdown in economic growth and tighter corporate margins if tariffs are enacted and companies choose to assume part of the increased price levels. Until the tariff policy decisions are finalised, it seems US equities may remain volatile and the outlook for corporate profits uncertain. For now, we remain neutral on US equities. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/the-fed-remains-on-hold-amid-tariff-uncertainty/
2025-05-08 12:02
Key takeaways The impact of tariffs and related uncertainty… …became clearer in the April data… …even if the magnitude of the blow to global growth and trade flows could take time to emerge The 90-day pause on additional ‘reciprocal’ tariffs, various carve outs, and reports of progress on some bilateral US trade negotiations have restored some calm to equity markets, but the global economic outlook is deteriorating amid enormous uncertainty (charts 1 and 2). Tariff uncertainty A 10% baseline tariff on all US imports has been in effect since 5 April and sectorspecific tariffs of 25% are either already in place or loom for a large range of major products. The better news is that President Trump announced some exemptions for the auto sector. However, the imposition of tariffs of 145%-plus on imports from mainland China, along with the demise of the de-minimis rule, are causing US firms to alter plans or cease imports entirely, while they await clarity and hope for relief. The Trump administration has already initiated discussions on new trade deals with over 70 countries, prioritising those geographically closer to China. But the likely outcome is highly uncertain, with President Trump having suggested he is unlikely to cut the baseline tariff below 10%. China has issued warnings of potential retaliation on third countries should such deals come at the expense of China’s trade (NY times, 21 April 2025). Source: Macrobond Source: Macrobond Survey softness The associated heightened anxiety in the US was very evident across an array of business and consumer surveys for April (chart 3): hiring intentions have slowed and US households are postponing or cancelling major purchases in response to the economic uncertainty. For now, though, the April data are mostly “soft” releases, with the only notable “hard” data so far being from the US labour market, which remains resilient (chart 4). Note: New York Fed data is for future capital expenditure and Reserve Bank of Dallas represent Texas retail outlook survey capital expenditure. Source: Macrobond Source: Macrobond Trade uncertainty The trade data is set to remain hard to track. Shipping data show plummeting flows from China to the US in March and April (chart 5). US imports from other partners, including some Asian countries have held up better and could continue to do so during what French president Macron has called a “fragile pause” on US tariffs. But looking ahead, the world now fears inflows of cheaper Chinese goods now finding it harder to access the US market. Note: Latest data point for 6 May 2025. Source: Bloomberg Source: Macrobond. Inflation divergence Surveys of US inflation expectations have also risen with the tariffs. Declining energy prices will be welcomed by most, but higher import costs will add to US inflation, particularly for goods (chart 6). Assuming no broad-based retaliation, Europe and particularly Asia, could see lower inflation, allowing a faster pace of monetary easing. Data highlights PMIs mostly fell in April, but before “Liberation Day” global data were looking OK. Mainland China reported robust GDP growth of 5.4% y-o-y in 1Q, with higher frequency indicators on the consumer side also showing signs of revival. In Europe, both GDP and the survey data showed improvement, while in the US, 1Q GDP (-0.3% q-o-q, annualised) was a mixed bag: the stagnant headline GDP print reflected a surge in pre-tariff imports while consumer spending (notably on cars) and other countries’ exports were supported for the same reason. Note: : ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus. Source: Bloomberg, HSBC Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/tariff-overhang/
