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/

2025-05-05 08:05

Key takeaways The BoJ delivered a dovish hold in May… …with markets less certain about a rate hike this year. The JPY weakened as a result, alongside receding “safe haven” flows. On 1 May, the Bank of Japan (BoJ) kept its policy rate unchanged by unanimous decision, continuing to guide the uncollateralised overnight call rate at around 0.5%, as widely expected. The tone of the meeting was rather dovish, with the latest BoJ forecasts (Table 1) suggesting downside risks to both growth and inflation. In our economists’ view, BoJ’s inflation forecasts edged lower, but not sufficiently enough to suggest its 2% price stability goal has been derailed. BoJ Governor Ueda’s press conference dwelt on the heightened uncertainty around the economic outlook vis-à-vis US tariffs but said that the BoJ would raise rates further if the economy continued to move in line with its outlook. Our economists expect the BoJ to hike once more this year, most likely in October; while markets are less sure for now, with a 25bp rate hike by year-end viewed as a coin toss (Bloomberg 1 May 2025). NA=Not applicable, as BoJ only starts to provide FY27 forecasts in its Outlook for Economic Activity and Prices (April 2025). Source: Bloomberg, HSBC Source: Bloomberg, HSBC The dovish hold by the BoJ has hit the JPY, alongside receding “safe haven” flows with the S&P 500 Index edging higher (Chart 2). Positioning wise, net long positions on the JPY among speculative traders recently climbed to an all-time high, according to data from the Commodity Futures Trading Commission (as of 22 April 2025). This could temper the enthusiasm for an extension. The path looks choppy ahead, as undershooting (market fear) and overshooting (market relief, short squeeze, or even temporary USD funding stress) of USD-JPY are likely. A short squeeze in USD-JPY could continue, if previously accumulated net long JPY positions continue to unwind as trade tensions ease. China’s Commerce Ministry said in a statement that it had noted senior US officials repeatedly expressing their willingness to talk to Beijing about tariffs (Bloomberg, 2 May 2025). Japan officials said that they aim to accelerate the talks from mid-May and achieve a trade agreement with the US in June (Bloomberg, 2 May 2025). On the other hand, an alleviation of tariff-induced downside risk to Japan’s growth could revive market expectations about the BoJ’s rate hikes. If there happens to be any FX clause in the potential trade agreement, which has thus far been denied (Bloomberg, 2 May 2025), that could also send USD-JPY lower. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-bojs-dovish-hold-met-with-a-short-squeeze/

2025-05-05 07:04

Key takeaways “Liberation Day” occurred on 2 April, but the latest data show the tariff threat was already affecting the US economy in Q1. Consumer spending was stronger than expected while equipment investment and inventories provided sizeable boosts to growth, as households and firms tried to get ahead of tariff-driven price rises. Indian fixed income returns were subdued in early 2025 as investors fretted over the country’s economic resilience to global headwinds. But that reversed sharply in March after the Reserve Bank of India finally kicked off its easing cycle. 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. Chart of the week – The first 100 days of Trump 2.0 The first 100 days of Trump 2.0 have been a rollercoaster ride in investment markets. Volatility has been driven by policy uncertainty, requiring investors to not only consider what the landing zone for tariff policy might be, but also how much damage may have already been done. Since the president’s inauguration on 20 January, the US dollar has been the weakest G10 currency, falling by more than 7% in GBP terms. While gradual depreciation may have been a policy objective of the new administration, the depth of the correction has hastened questions about a possible end of “US exceptionalism”. And the surging gold price – up by 22% in the first 100 days – has reinforced a sense of investor uncertainty. US stocks have been laggards too – the S&P 500 has been among the worst performing stock indexes. Meanwhile, we’ve had market correlations going haywire between stocks and bonds, and interest rates and dollar crosses. The critical issue now is what happens next? At least part of the answer depends on how the macro facts evolve relative to what investors are currently assuming. The consensus seems to believe in a return to normal patterns, with growth and profits softening, then re-accelerating. But the problem with this is that recent trends in markets have been anything but normal and policy uncertainty is still ultra-high. It means staying invested and preparing portfolios for continued regime uncertainty and elevated market volatility is still the right strategy. That involves more granular country, regional, and factor allocations – and integrating assets and strategies that tend to be uncorrelated to stocks, including alternatives. Market Spotlight Power hungry A major new study by the International Energy Agency projects that electricity demand from data centres worldwide will more than double by 2030 to around 945 terawatt-hours. That’s slightly more than the entire electricity consumption of Japan today. Easily the biggest driver of this increase is AI, with power demand from AI-optimised data centres on course to quadruple by 2030. In the US – which currently accounts for around half the world’s data centres – power consumption from these facilities looks set to account for almost half the growth in electricity demand over the same period. This intense demand growth could be potentially transformational for the electricity industry, which has seen no growth for two decades, as well as other sectors. Recent analysis by some specialists pinpoints key areas where the asset class could participate. They see opportunities in high-growth areas of the communications and energy infrastructure sectors, but among the biggest is in utilities. Here, there is a broad range of companies across all regions and markets exposed to different aspects of the data centre growth dynamic, and investment opportunities across the sector. 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 02 May 2025. Lens on… Wait and see “Liberation Day” occurred on 2 April, but the latest data show the tariff threat was already affecting the US economy in Q1. Consumer spending was stronger than expected while equipment investment and inventories provided sizeable boosts to growth, as households and firms tried to get ahead of tariff-driven price rises. However, this was not enough to offset a surge in goods imports, which led GDP to contract for the first time since Q1 2022. While business and consumer spending were robust in Q1 and, on most measures, the labour market continues to hold up, a swathe of surveys point to a meaningful slowdown at some point. Where does this leave the Fed ahead of its May meeting? Most likely, it will maintain a “wait and see” approach as it looks through the policy and data fog. However, one helpful development was a weak March core PCE inflation print, which suggests underlying price pressures were diminishing prior to any tariff-induced increase. Combined with well-behaved market-based inflation expectations, this should allow the FOMC to cut rates gradually from June. India’s bond appeal Indian fixed income returns were subdued in early 2025 as investors fretted over the country’s economic resilience to global headwinds. But that reversed sharply in March after the Reserve Bank of India finally kicked off its easing cycle. Inflation is now well within the central bank’s 4% target range, and expected to remain in retreat. For global allocators, higher real yields have been a key attraction of Indian bonds – but there are other catalysts at play too. The main one, of course, is that the domestic orientation of India’s economy is a key advantage. It makes Indian assets less sensitive to shifts in global risk sentiment, and so a potentially attractive way to diversify global portfolios. Technical factors are also playing a role. Moves by the RBI to improve market liquidity, and the government’s pursuit of fiscal consolidation should be positive for bond supply-demand dynamics. And India’s strong FX reserve buffers help to counter volatility in capital flows and cushion currency volatility. Meanwhile, inclusion in global government bond indices, including GBI-EM and, later this year, FTSE, are also expected to grow global interest – and is a further potential reason for including India fixed income in a strategic allocation. With friends like these 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. Data as at 7.30am UK time 02 May 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 02 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 markets were mixed as investors assessed Q1 corporate earnings, macro data and ongoing global trade developments. US Q1 GDP contracted on a surge in imports, though the ISM manufacturing index declined less than anticipated, ahead of April’s non-farm payrolls data. The US dollar index further rebounded, while core government bonds edged higher. US and European credit spreads widened modestly after two weeks of narrowing. In stock markets, US indices broadly gained, as tech stocks led the rallies on some positive earnings. European markets mostly advanced, driven by strong Q1 results in the financial and defence sectors. Japan’s Nikkei 225 rose as dovish BoJ comments weighed on the yen, boosting export-oriented stocks. Other Asian markets, including Hong Kong’s Hang Seng and India’s Sensex, recorded gains, though the Shanghai Composite closed slightly lower ahead of Labour Day holidays. In commodities, oil prices fell amid concerns over a weaker demand outlook, while gold extended its recent consolidation. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/the-first-100-days-of-trump-2/

2025-04-28 08:05

Key takeaways The ECB cut rates by 25bp in April, in line with expectations. The EUR is stronger than what its yield differential implies, which could be explained by the EUR’s safe haven persona. The EUR is likely to strengthen against the USD (but at a slower pace) in the weeks ahead. On 17 April, the European Central Bank (ECB) delivered a 25bp cut, bringing the deposit rate to 2.25%. This was its sixth consecutive cut (and the seventh in total for this cycle since last July), in line with market expectations. “Economic risks are starting to materialise,” noted Bank of Finland governor Ollie Rehn. He added that, “There are few good reasons to pause rates…and the ECB shouldn’t rule out larger cuts” (Bloomberg, 24 April 2025), illustrating the increasingly dovish sentiment within the ECB governing council. Markets may also be more attuned to the deteriorating economic outlook in the Eurozone and the prospect of more rate cuts to come, with further easing of c62bp by the end of the year in the price (Bloomberg, 23 April 2025). It is worth noting that the EUR looks rich relative to its rate differentials (Chart 1). It may not be enough to turn sentiment on the EUR, but it is another factor likely to quell the topside, especially if the Federal Reserve is offering a pause policy when the ECB is still cutting. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Meanwhile, the EUR is exhibiting a “risk off” persona (Chart 2), perhaps aided by the timely afterglow of the European fiscal policy U-turn in 1Q25. On the flip side, US political uncertainty has diminished the USD’s “safe haven” brand. Uncertainty around US trade policy is likely to persist, alongside “tariff on-tariff off” headlines, and news flow around the multiple trade negotiations. The key challenge is whether the flows into EUR continue, and this relies on a “risk off” mood being evident more often than not. If the mood music around trade changes, so too will the EUR. All things considered, a move higher in EUR-USD seems more probable than not in the weeks ahead. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-s-safe-haven-persona/