Top of main content
Investment Weekly: Central bankers: should I stay or should I go?

25 Mar 2024

Key takeaways

  • The 10-year BTP/Bund spread has fallen to its tightest since November 2021. That follows a pattern of other global credit spreads compressing to new tights.
  • The starting point for our global macro scenarios is the recent experience of ‘Reaccelerating Growth’ amid a virtuous cycle between robust consumption, resilient profits, and a strong labour market.
  • In India, the 2015 Digital India initiative helped move the country higher up the tech value chain. Since the fourth industrial revolution began, technology has been adopted in different ways as a crucial enabler of economic growth.

Central bankers: should I stay or should I go?

It’s been a big week for central banks. And the key question has been: “should I stay or should I go?”. The Bank of Japan answered with a historic decision to exit from negative interest rates, following the highest shunto pay round negotiation since 1991. The Swiss National Bank surprised markets with a 25bp rate cut, with inflation below 2% since the summer. 

Meanwhile, the Fed and BoE decisions to ‘stay’ were hardly a surprise. But the Fed maintained its projection of three rate cuts in 2024, despite some recent upside inflation surprises. And the BoE hawks fell in line with the majority vote to hold.

The implications for investment markets are complex. On a tactical basis, rate cuts being on the table is undoubtedly supportive for risk appetite. But much will also depend on the pace of cuts, especially with a bumpy ‘last mile’ of disinflation ahead of us.

And where will interest rates ultimately settle? Structurally tight labour markets are set to keep upward pressure on wages. Global economic fragmentation raises input costs. And fiscal policy is activated. These forces make a return to the ultra-low interest rate regime of the 2010s unlikely. Instead, a new paradigm of higher rates is coming into view.

Market Spotlight

Steady as she goes for EM easing

A number of EM central banks also met this week. The bottom line is interest rate cuts are progressing in much of Latin America and emerging Europe. Banco Central do Brasil delivered another 50bp cut, while Banxico kicked off its easing cycle with a 25bp cut. Czechia also cut for the third time in a row.

But could there be trouble ahead? Earlier this month, Peru unexpectedly held off on another rate cut, reflecting concern over February’s inflation surprise. Central bankers in Brazil shortened their forward guidance on cuts, citing slowing global disinflation and some stickiness in services. That message was echoed by the Czechs.

All in all, this suggests policy normalisation could become more gradual, especially if the Fed delays cuts and EM FX depreciation becomes a more material concern. But with EM stock market multiples significantly less stretched than DM counterparts, further policy easing – even if measured – provides a potential catalyst for rerating. A tailwind to EM asset returns may also come from gains in EM currencies – which still look very cheap. The Fed and ECB kicking off their easing cycles could unlock some of the value here.

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.

Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11am UK time 22 March 2024.

Lens on…

Italian bonds are back

The 10-year BTP/Bund spread has fallen to its tightest since November 2021. That follows a pattern of other global credit spreads compressing to new tights.

What makes the story interesting in BTPs and Bunds is the speed at which spread compression has played out. Since last November, the spread has squeezed lower by about 80 basis points. That’s a fast move in the context of what we normally see.

So, the drivers of the BTP/Bund move are partly global, and partly local. The global element is the increased confidence that market participants have in the ‘soft landing’ scenario (or something even better). The local part relates to the upgraded outlook by Moody’s late last year to ‘stable outlook’. 

Even so, the rapidity of the move is a concern and could prompt some short-term volatility. The economic outlook continues to look okay, but just maybe not quite as perfect as what markets are now priced for.

Exploring the macro outlook

The starting point for our global macro scenarios is the recent experience of ‘Reaccelerating Growth’ amid a virtuous cycle between robust consumption, resilient profits, and a strong labour market. But looking ahead, it’s likely this will give way to one of three key scenarios. Perhaps the most desirable of them is the ‘Golden Path’, which envisages rising productivity growth driving GDP growth higher and delivering further gains in risk assets.

The most bearish is the ‘Hard Landing’, where dogged inflation spurs tighter-for-longer policies that hurt companies and consumers to the point of recession. A middle ground – and perhaps the most likely for now – is the ‘Softish Landing’, characterised by disinflation, economic resilience and central bank rate cuts – but with some bumps along the way.

India’s digital empowerment

Since the fourth industrial revolution began, technology has been adopted in different ways as a crucial enabler of economic growth. 

In India, the 2015 Digital India initiative helped move the country higher up the tech value chain. The government’s commitment to leveraging technology to drive economic growth has helped put it on course to be the world’s third largest economy by 2027. Out of a population of 1.44 billion people, it boasts 1.2bn internet users, 1.14bn mobile subscribers, and 800m e-commerce users.

In short, the potential is significant given the government’s desire to boost domestic consumption via technology, and encourage firms to spend in areas like automation, robotics, AI and cloud computing. 

Naturally, this has encouraged a vibrant and experimental start-up community. India now boasts the third largest start-up ecosystem with its number of domestic unicorns (private firms with valuations of more than USD 1bn) now only behind that of the US and China. Meanwhile, quoted tech stocks have performed well, with the S&P India Tech index up by more than 30% over one year.

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future.

Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 11am UK time 22 March 2024.

Key Events and Data Releases

Last week

The week ahead

Source: HSBC Asset Management. Data as at 11am UK time 22 March 2024.

Market review

Dovish comments from Fed Chair Powell, reiterating that rate cuts are on the agenda in 2024, spurred a rally in risk markets, with core government bonds posting modest gains. The Swiss National Bank cut rates by 25bp to 1.5%, the first developed country to ease policy. In the US, the S&P 500 and Nasdaq reached all-time highs, with the Russell 2000 rising to a two-year high. Eurozone stocks posted decent gains. In Asia, the Bank of Japan exited its Negative Interest Rate Policy, raising rates for the first time since 2007, but BoJ governor Ueda failed to signal further rate hikes near-term, boosting the Nikkei as the yen weakened. In EM, the Shanghai Composite Index rose amid mixed Chinese data. Taiwan’s central bank surprisingly hiked rates by 0.125% to 2% to contain inflation. In commodities, oil consolidated after recent gains, while gold reached a historic high.

Related Insights

As widely expected, the Federal Reserve voted unanimously to leave the target benchmark...[22 Mar]
As we enter the second quarter, we see a brighter outlook with the Fed rate cuts just...[15 Mar]
The recent upside surprise on US inflation data does not change our view that the Fed will...[1 Mar]

Disclaimer

This document or video is prepared by The Hongkong and Shanghai Banking Corporation Limited (‘HBAP’), 1 Queen’s Road Central, Hong Kong. HBAP is incorporated in Hong Kong and is part of the HSBC Group. This document or video is distributed and/or made available by HSBC Bank Canada (including one or more of its subsidiaries HSBC Investment Funds (Canada) Inc. (“HIFC”), HSBC Private Investment Counsel (Canada) Inc. (“HPIC”) and HSBC InvestDirect division of HSBC Securities (Canada) Inc. (“HIDC”)), HSBC Bank (China) Company Limited, HBAP, HSBC Bank (Singapore) Limited, HSBC Bank Middle East Limited (UAE), HSBC UK Bank Plc, HSBC Bank Malaysia Berhad (198401015221 (127776-V))/HSBC Amanah Malaysia Berhad (20080100642 1 (807705-X)), HSBC Bank (Taiwan) Limited, HSBC Bank plc, Jersey Branch, HSBC Bank plc, Guernsey Branch, HSBC Bank plc in the Isle of Man, HSBC Continental Europe, Greece, The Hongkong and Shanghai Banking Corporation Limited, India (HSBC India), HSBC Bank (Vietnam) Limited, PT Bank HSBC Indonesia (HBID), HSBC Bank (Uruguay) S.A. (HSBC Uruguay is authorised and oversought by Banco Central del Uruguay), HBAP Sri Lanka Branch, The Hongkong and Shanghai Banking Corporation Limited – Philippine Branch, HSBC Investment and Insurance Brokerage, Philippines Inc, and HSBC FinTech Services (Shanghai) Company Limited and HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group (collectively, the “Distributors”) to their respective clients. This document or video is for general circulation and information purposes only.

The contents of this document or video may not be reproduced or further distributed to any person or entity, whether in whole or in part, for any purpose. This document or video must not be distributed in any jurisdiction where its distribution is unlawful. All non-authorised reproduction or use of this document or video will be the responsibility of the user and may lead to legal proceedings. The material contained in this document or video is for general information purposes only and does not constitute investment research or advice or a recommendation to buy or sell investments. Some of the statements contained in this document or video may be considered forward looking statements which provide current expectations or forecasts of future events. Such forward looking statements are not guarantees of future performance or events and involve risks and uncertainties. Actual results may differ materially from those described in such forward-looking statements as a result of various factors. HBAP and the Distributors do not undertake any obligation to update the forward-looking statements contained herein, or to update the reasons why actual results could differ from those projected in the forward-looking statements. This document or video has no contractual value and is not by any means intended as a solicitation, nor a recommendation for the purchase or sale of any financial instrument in any jurisdiction in which such an offer is not lawful. The views and opinions expressed are based on the HSBC Global Investment Committee at the time of preparation and are subject to change at any time. These views may not necessarily indicate HSBC Asset Management‘s current portfolios’ composition. Individual portfolios managed by HSBC Asset Management primarily reflect individual clients’ objectives, risk preferences, time horizon, and market liquidity.

The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. Past performance contained in this document or video is not a reliable indicator of future performance whilst any forecasts, projections and simulations contained herein should not be relied upon as an indication of future results. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries in which they trade. Investments are subject to market risks, read all investment related documents carefully.

This document or video provides a high level overview of the recent economic environment and has been prepared for information purposes only. The views presented are those of HBAP and are based on HBAP’s global views and may not necessarily align with the Distributors’ local views. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. It is not intended to provide and should not be relied on for accounting, legal or tax advice. Before you make any investment decision, you may wish to consult an independent financial adviser. In the event that you choose not to seek advice from a financial adviser, you should carefully consider whether the investment product is suitable for you. You are advised to obtain appropriate professional advice where necessary.

The accuracy and/or completeness of any third-party information obtained from sources which we believe to be reliable might have not been independently verified, hence Customer must seek from several sources prior to making investment decision.

Important Information about HSBC Global Asset Management (Canada) Limited (“AMCA”)

HSBC Asset Management is a group of companies, including AMCA, that are engaged in investment advisory and fund management activities, which are ultimately owned by HSBC Holdings plc. AMCA is a wholly owned subsidiary of, but separate entity from, HSBC Bank Canada.

Important Information about HSBC Investment Funds (Canada) Inc. (“HIFC”)

HIFC is the principal distributor of the HSBC Mutual Funds and offers the HSBC Mutual Funds and/or the HSBC Pooled Funds through the HSBC World Selection® Portfolio service. HIFC is a subsidiary of AMCA, and indirect subsidiary of HSBC Bank Canada, and provides its products and services in all provinces of Canada except Prince Edward Island. Mutual fund investments are subject to risks. Please read the Fund Facts before investing.

®World Selection is a registered trademark of HSBC Group Management Services Limited.

Important Information about HSBC Private Investment Counsel (Canada) Inc. (“HPIC”)

HPIC is a direct subsidiary of HSBC Bank Canada and provides services in all provinces of Canada except Prince Edward Island. The Private Investment Counsel service is a discretionary portfolio management service offered by HPIC. Under this discretionary service, assets of participating clients will be invested by HPIC or its delegated portfolio manager, AMCA, in securities, including but not limited to, stocks, bonds, mutual funds, pooled funds and derivatives. The value of an investment in or purchased as part of the Private Investment Counsel service may change frequently and past performance may not be repeated.

Important Information about HSBC InvestDirect (“HIDC”)

HIDC is a division of HSBC Securities (Canada) Inc., a direct subsidiary of, but separate entity from, HSBC Bank Canada. HIDC is an order execution only service. HIDC will not conduct suitability assessments of client account holdings or of the orders submitted by clients or from anyone authorized to trade on the client’s behalf. Clients have the sole responsibility for their investment decisions and securities transactions.

The following statement is only applicable to HSBC Mexico, S.A. Multiple Banking Institution HSBC Financial Group with regard to how the publication is distributed to its customers: This publication is distributed by Wealth Insights of HSBC México, and its objective is for informational purposes only and should not be interpreted as an offer or invitation to buy or sell any security related to financial instruments, investments or other financial product. This communication is not intended to contain an exhaustive description of the considerations that may be important in making a decision to make any change and/or modification to any product, and what is contained or reflected in this report does not constitute, and is not intended to constitute, nor should it be construed as advice, investment advice or a recommendation, offer or solicitation to buy or sell any service, product, security, merchandise, currency or any other asset.

Receiving parties should not consider this document as a substitute for their own judgment. The past performance of the securities or financial instruments mentioned herein is not necessarily indicative of future results. All information, as well as prices indicated, are subject to change without prior notice; Wealth Insights of HSBC Mexico is not obliged to update or keep it current or to give any notification in the event that the information presented here undergoes any update or change. The securities and investment products described herein may not be suitable for sale in all jurisdictions or may not be suitable for some categories of investors.

The information contained in this communication is derived from a variety of sources deemed reliable; however, its accuracy or completeness cannot be guaranteed. HSBC México will not be responsible for any loss or damage of any kind that may arise from transmission errors, inaccuracies, omissions, changes in market factors or conditions, or any other circumstance beyond the control of HSBC. Different HSBC legal entities may carry out Wealth Insights internationally in accordance with local regulatory requirements. HSBC specifically prohibits the redistribution of this material and is not responsible for any actions that third parties may take to and/or with it.

Important Information about the Hongkong and Shanghai Banking Corporation Limited, India (“HSBC India”)

HSBC India is a branch of The Hongkong and Shanghai Banking Corporation Limited. HSBC India is a distributor of mutual funds and referrer of investment products from third party entities registered and regulated in India. HSBC India does not distribute investment products to those persons who are either the citizens or residents of United States of America (USA), Canada, Australia or New Zealand or any other jurisdiction where such distribution would be contrary to law or regulation.

The following statement is only applicable to HSBC Bank (Taiwan) Limited with regard to how the publication is distributed to its customers: HSBC Bank (Taiwan) Limited (“the Bank”) shall fulfill the fiduciary duty act as a reasonable person once in exercising offering/conducting ordinary care in offering trust services/ business. However, the Bank disclaims any guarantee on the management or operation performance of the trust business.

The following statement is only applicable to PT Bank HSBC Indonesia (“HBID”): PT Bank HSBC Indonesia (“HBID”) is licensed and supervised by Indonesia Financial Services Authority (“OJK”). Customer must understand that historical performance does not guarantee future performance. Investment product that are offered in HBID is third party products, HBID is a selling agent for third party product such as Mutual Fund and Bonds. HBID and HSBC Group (HSBC Holdings Plc and its subsidiaries and associates company or any of its branches) does not guarantee the underlying investment, principal or return on customer investment. Investment in Mutual Funds and Bonds is not covered by the deposit insurance program of the Indonesian Deposit Insurance Corporation (LPS).

THE CONTENTS OF THIS DOCUMENT OR VIDEO HAVE NOT BEEN REVIEWED BY ANY REGULATORY AUTHORITY IN HONG KONG OR ANY OTHER JURISDICTION.

YOU ARE ADVISED TO EXERCISE CAUTION IN RELATION TO THE INVESTMENT AND THIS DOCUMENT OR VIDEO. IF YOU ARE IN DOUBT ABOUT ANY OF THE CONTENTS OF THIS DOCUMENT OR VIDEO, YOU SHOULD OBTAIN INDEPENDENT PROFESSIONAL ADVICE.

© Copyright 2024. The Hongkong and Shanghai Banking Corporation Limited, ALL RIGHTS RESERVED.

No part of this document or video may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited.

Important information on sustainable investing

In broad terms “ESG and sustainable investing” products include investment approaches or instruments which consider environmental, social, governance and/or other sustainability factors to varying degrees. Certain instruments we classify as sustainable may be in the process of changing to deliver sustainability outcomes. There is no guarantee that ESG and Sustainable investing products will produce returns similar to those which don’t consider these factors. ESG and Sustainable investing products may diverge from traditional market benchmarks. In addition, there is no standard definition of, or measurement criteria for, ESG and Sustainable investing or the impact of ESG and Sustainable investing products. ESG and Sustainable investing and related impact measurement criteria are (a) highly subjective and (b) may vary significantly across and within sectors.

HSBC may rely on measurement criteria devised and reported by third party providers or issuers. HSBC does not always conduct its own specific due diligence in relation to measurement criteria. There is no guarantee: (a) that the nature of the ESG / sustainability impact or measurement criteria of an investment will be aligned with any particular investor’s sustainability goals; or (b) that the stated level or target level of ESG / sustainability impact will be achieved. ESG and Sustainable investing is an evolving area and new regulations are being developed which will affect how investments can be categorised or labelled. An investment which is considered to fulfil sustainable criteria today may not meet those criteria at some point in the future.