2026-05-20 07:03

Key takeaways Average temperatures and food price sensitivity to heat are rising; temperature is outperforming rains in forecasting inflation. In El Niño years specifically, temperature spikes have become more likely than rainfall deficit; and these spikes are intensifying. With twin energy and El Niño shocks, we forecast FY27 inflation at 5.6%, GDP at 6%, and two rate hikes over 4Q26 and 1Q27, taking the repo rate to 5.75% (earlier: hold). A couple of years ago, we pointed out that reservoir levels matter more than rains for India’s food production and inflation. More recently, we took our next leap—from rains and reservoirs, to temperatures. With global warming, average temperatures are rising and have crossed previous thresholds. They now impact food output and inflation much more than even rains and reservoirs do. In fact, tracking surface temperature is enough to get a good sense of where food inflation is headed. This matters a lot more in a likely El Niño year. We find that the probability of high temperatures is stronger than the probability of low rains, and the quantum of rise in temperatures during El Niño years is rising. No crop escapes. Perishables like vegetables and fruits are traditionally more sensitive to heatwaves, and this sensitivity is rising. Durable crops like cereals, pulses, oilseeds and sugar are not too far behind as old temperature thresholds are breached. Even animal protein sources are becoming more sensitive to heat. So what role do rains and reservoirs still play? We test this using our trusted food inflation model. When we include temperatures, reservoir levels lose importance—they get “crowded out”. Keeping temperatures but excluding rains/reservoirs improves the model’s ability to predict food inflation. The message is clear. Temperatures have become far better than rainfall in explaining and forecasting food inflation. Possible reasons: irrigation has improved, reservoir levels and temperatures have a 50% correlation (so information in the reservoir variable gets picked up by temperature), and the relationship between temperatures and inflation is non-linear—as old thresholds are breached, even durable food inflation is affected. With the energy and El Niño shocks coinciding, the FY27 outlook needs attention. Our model suggests the El Niño/temperature channel can add 0.5ppt to inflation over a year. Adding this to our estimates from the energy shock (including local pump price increases), we expect headline inflation to average 5.6% in FY27. On this basis, we expect the RBI to deliver two rate hikes, over 4Q26 and 1Q27, taking the repo rate to 5.75%. The accompanying growth shock will likely stop it from hiking a lot more. Bringing together both the shocks, and factoring in some fiscal slippage, we forecast GDP to grow 6% in FY27, lower than our previous year’s forecast of 7.4%. We expect the brunt of the shock to be felt by the informal sector—rural households and small firms—marking a change in India’s drivers of growth. Forget the raindrops… We have been steadily refining our views on inflation drivers over the last decade. And our latest findings suggest that it’s time to get prepared for rising inflation. A couple of years ago, we pointed out that reservoir levels matter more than rains for India’s food production and inflation (as they capture underground water as well). Later we pointed out that trends in reservoir levels have been changing too. More recently, we took our next leap, from rains and reservoirs to temperatures. With global warming, average temperatures have crossed previous thresholds (see exhibit 1). They now impact food output and inflation much more than even rains and reservoirs do. In fact, we find that tracking surface temperature is enough to get a good sense of where food inflation is headed. We don’t even need to track rains in most parts (details later)! In this report, we extend our work on surface temperatures mattering more than before. We analyse what it means for a year when the chances of an El Niño developing around mid-year are high. As is well known, an El Niño is associated with low rains, high temperatures, higher food inflation, and lower growth. We go episode-by-episode, and crop-by-crop, and we think the results are too significant to ignore. …bring out your thermometers We have an extensive database of average surface temperatures across India since the 1950s, which shows that surface temperatures have been rising over time, as is the volatility in food prices (see exhibits 1 and 2). Indeed, there is growing evidence now that heatwaves in India are starting earlier, lasting longer, and becoming more intense. What we find next is that the correlation between average temperature and India’s food inflation has been rising consistently over time (see exhibit 3). As the earth is heating up, crop yields are falling. Some of this is fresh in memory. The heatwave of March 2022 lowered the sugar cane crop yield by 30%, while hurting the production of vegetables, as well as oilseeds. In the heatwave of March 2024, temperatures rose to 50.5 degrees Celsius in some areas, leading to heat stress. The sharp rise in vegetable prices was a reflection of the crop damage. Enter El Niño All this matters a lot more in an El Niño year. Just to recall, an El Niño is associated with low rains and high temperatures (see exhibit 4). But beyond the headline, there are some lesserknown consequences of El Niño in India. One, the probability of high temperatures is stronger than the probability of low rains. For instance, in the FY20 and FY25 El Niño years, rains were strong despite being an El Niño year. But for both these years, temperatures shot up compared to the normal. Two, the quantum of rise in temperatures during El Niño years is rising (see exhibit 5). And this is where the worry lies – the impact of surface temperature on food inflation is rising, surface temperatures are rising too, El Niño is associated with higher-than-normal temperatures, and the quantum of spike in temperature in El Niño years is also on the rise. No crop escapes Analysing a decade of data, we find the correlation between average temperature and food inflation has been rising across all the main crops. Perishable crops like vegetables and fruits have traditionally been more sensitive to heatwaves than others, and this sensitivity is rising (see exhibits 6-7). Durable crops like cereal, pulses, oilseeds and sugar are not too far behind. True that they have traditionally been less sensitive to heat, but the sensitivity is rising, as old temperature thresholds are being breached (see exhibits 8-11). Even the price of dairy, poultry and fishery products, which we, on aggregate, call animal protein sources of food, are becoming increasingly more sensitive to rising temperatures (see exhibits 12-13). The rains versus temperature debate This, then, brings us to another important question. If the sensitivity of food production and inflation to temperatures has risen over time, what role do rains and reservoirs play? To answer this carefully, we get a little more technical than just running correlations. We bring out our trusted food inflation OLS model, which can help us parse the role of temperatures on food inflation better, while including other variables that also impact food inflation. First, we re-run our old food inflation model for the 2007-2026 period (see regression 1 in exhibit 14). It includes reservoir levels, the government’s minimum support prices for agriculture, and dummy variables for the government’s food supply-side management steps to lower inflation, and the pandemic period. Each of these variables is economically and statistically significant in explaining food inflation trends. The model has a strong R-squared of 85%. Next, we include temperature in our model (see regression 2 in exhibit 14). And it doesn’t sit too comfortably with the other variables. The temperature variable is clearly statistically significant, but the reservoir variable turns insignificant. This could mean that temperature is crowding out the significance of reservoirs. Perhaps the temperature variable contains all the information which the rainfall variable holds, and more. Because, the fit of the model improves. R-squared increases from 85% to 90%. Finally, we keep the temperature variable in the model but remove the reservoir variable (see regression 3 in exhibit 14). And this drastically improves our model. Each of the explanatory variables is economically and statistically significant. And the model’s R-squared is at an elevated 90%. What’s lowered the importance of rains? Temperatures are far superior than rainfall in explaining and forecasting food inflation. In fact, once temperatures are included, there is no value in analysing rains and reservoir levels. Indeed, over time, the coefficient of reservoir in our regression model has been falling, indicating than its importance has dwindled. There could be several reasons for this: With irrigation facilities improving over time, the low rains problem has been partly circumvented, especially in certain areas like north-western India. With reservoirs and temperatures having a 50% correlation, our sense is that a lot of the meaningful information contained in the reservoir variable gets picked up by temperatures. There is a non-linear relationship between temperatures and food inflation. With temperatures having crossed certain thresholds, the sensitivity of non-perishable food inflation to heat has risen. Outlook for FY27: Inflation and RBI action It’s a season of overlapping shocks – energy, industrial feeds, and a likely El Niño. Quantifying the El Niño shock: Our food inflation model (regression 3 in exhibit 14) quantifies the impact of rising temperatures on food inflation. If the rise in temperature is in line with the last 10-year average, we calculate that inflation could be 0.5ppt higher over a year from the onset of the El Niño. If the El Niño sets in later in 2026, then much of the impact could be felt in 2027. There are two-way risks to our estimate here. A severe El Niño would mean a sharper rise in prices. On the other hand, full up granaries could help ease some of the inflationary pressures. Quantifying the energy shock: In a recent report, we did a detailed analysis of the impact of the energy shock on headline inflation by bringing together domestic pump prices, brent prices, and agricultural and industrial input prices across several oil price scenarios. We assumed a rise in pump petrol and diesel prices by around INR6-7/litre. We also found that the inflation passthrough due to FX depreciation can be broadly offset by an emerging output gap. Bringing it all together, we estimated that if oil averages USD95/bbl in FY27, inflation could rise by 1.3ppt. At the start of the year, our inflation forecast for FY27 was 4%. The two shocks can raise it to 5.6%. We also believe that some of the El Niño pressure could be felt in the winter crop, keeping inflation elevated in the first half of FY28. Depending on when the El Niño sets in, inflation could be higher than 6% for 2-3 quarters as per our forecasts (see exhibit 15). We have assumed a INR6-7/litre rise in petrol and diesel prices in our forecast, as we believe that will address the pain felt by oil PSUs. If that rise were not to happen, average inflation would be closer to 5.3% for FY27. But inflation would still cross 6% for a 2-3 quarter period. On the back of our forecast that inflation will rise to 6% or higher for 2-3 quarters between Sep 2026 and Sep 2027, led by higher oil prices and the impact of rising temperatures in the El Niño, we are now forecasting two repo rate hikes over 4Q 2026 and 1Q2027, taking the repo rate to 5.75% (versus previous forecast of no change in rates). We are not forecasting an immediate rate hike in the upcoming June meeting, because the government is running welfare schemes at a time when the energy crisis is in full swing. The RBI may also want to remain growth supportive. Instead we expect the hikes to begin when we are over the peak of the energy crisis. We are not forecasting a bigger rate hike than 50bp for now because (1) we believe the RBI will look through part of the inflation increase as temporary (given we forecast CPI inflation to asymptote towards 4% by March 2028), and (2) we believe growth will also fall meaningfully due to the twin shocks, and the RBI may have to be mindful of that. Outlook for FY27: Growth and government action The twin shock is likely to take a toll on growth too. We believe the informal sector, comprising rural workers and urban informal workers (for instance those working in MSMEs) get impacted most during supply shocks. Heatwaves will impact farmers directly, and high energy inflation will likely impact both the rural and urban informal workers, who, together make up two-thirds of consumption (see exhibit 16). We estimate that the price and quantity disruptions in energy sources can shave off around 1ppt from growth. An El Niño could shave off a further 0.3ppt from growth. The government will likely step in to support growth with credit guarantee schemes, rural unemployment benefits, and public capex. We expect a fiscal slippage by about 0.3% of GDP (see exhibit 17). Overall, we forecast GDP growth to average 6% in FY27 (versus an estimated 7.4% in FY26, see exhibit 18) and inflation to average 5.6% in FY27 (versus 2% a year ago). https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/why-rbi-may-need-a-thermometer/

2026-05-19 12:01

Key takeaways The constructive tone at the first China-US presidential summit of the year was backed by concrete actions. Upside surprises from possible tariff cuts on “non-critical” goods and progress on a Board of Investment. The summit should boost business confidence, with more engagement scheduled later this year. China data review (April 2026) Retail sales slowed to 0.2% y-o-y in April, mainly due to a high base from last year and some pullback in the scale of trade-in subsidies. The weakness was concentrated in goods, with auto sales (-15.3% y-o-y) the biggest drag, weighed down by the partial removal of new energy vehicle purchase tax exemptions. By contrast, services consumption remained more resilient, with the services production index up 4.3% y-o-y in April. Fixed asset investment fell 9.4% y-o-y in April, marking a clear loss of momentum after a stronger Q1. The slowdown was broad-based, with manufacturing (-4.3%) weighed down by global uncertainties and softer domestic demand, infrastructure (-3.0%) affected by a softening of the pace of government bond issuance, and property (-19.6%) continuing to stay weak. Industrial production moderated to 4.1% y-o-y in April (from 5.7% in March) largely reflecting still weak domestic demand and a stronger pass-through from higher oil costs. Instead, external demand and high-tech manufacturing were primary drivers, as seen in the outperformance in auto and electronics production, consistent with the ongoing export strength. CPI was broadly stable in April, up 1.2% y-o-y, with the impact of the energy shock mainly concentrated on energy components while food items turned into a drag. PPI surged to 2.8% y-o-y driven by rapid oil price pass-through, AIdemand and anti-involution measures. Early signs of cost pass-through suggest downstream sector responses to core CPI will be key to monitor. Exports rose 14.1% y-o-y in April, regaining momentum as seasonal distortions faded, with strength supported by global AI demand, China’s competitiveness in transport-related goods and lower US tariffs. Imports increased 25.3% y-o-y driven by AI-driven demand and industrial upgrading while rising energy and copper prices also pushed up their import values. China-US summit: Trade and investment boosts The first China-US presidential summit of the year was to all intents and purposes a success, with President Xi noting that relations had reached “constructive strategic stability” and President Trump stating that the relations would be “better than ever before”. The positive messaging is supported by concrete actions, although some details still need to be hashed out. Agreements and discussions were broad-based, covering areas from trade and investment to market access, fentanyl and geopolitics (Table 1). Source: White House, Xinhua, CNBC, Bloomberg, Reuters, HSBC The themes were within our expectations, but there were still some upside surprises. For one, a potential reduction in tariffs in areas deemed “non-critical and non-strategic” could cover c10% of US imports from China (based on 2025 figures). This could help revitalise some direct exports to the US, which have fallen 10% year-to-date y-o-y (albeit a softer pace than last year’s 20% decline). Secondly, more concrete discussions around the setting up of a Board of Investment exceeded our expectations – we originally thought it would take more exchanges to reach such an understanding. The US administration is open to more Chinese investment in its manufacturing industries provided it does not involve sensitive areas. Ultimately, there will still need to be more details and sufficient guardrails around investments, but we see more potential for re-engagement along this front. Outbound Direct Investment (ODI) flows to the US accounted for 3.5% of total Chinese ODI in 2024, compared with a peak of 8.7% in 2016. President Trump’s business delegation included CEOs and leadership of some of US’s largest companies, ranging from technology and semiconductor companies to agriculture and finance. The White House readout emphasised discussions on improving market access for US firms, in line with China’s medium and longer-term goals of higher-level opening up, as highlighted in the 15th Five Year Plan. By the end of President Trump’s visit, no major deals had been signed, but we expect agreements to be finalised in the coming days and weeks. Ultimately, the successful summit should help restore some business confidence, with broad-based discussions and agreements building on the momentum established in Busan six months ago. This sets the stage for more constructive engagement, including potentially at least three more presidential summits this year: an invitation for President Xi to visit the White House on 24 September, the APEC summit in November in Shenzhen, and the G20 summit in December in Miami. Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 15 May 2026, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/china-us-summit-trade-and-investment-boosts/

2026-05-18 12:01

Key takeaways The Trump-Xi summit, which was held in Beijing on 14-15 May, concluded as an event with a mix of symbolism and selective progress. It appeared to reinforce market expectations that both countries remain focused on preventing renewed escalation in trade and technology competition, which should help limit downside sentiment. President Xi has been invited to visit the US on 24 September 2026, along with two other key international summits (APEC in November and G20 in December), setting the stage for more positive engagement between the US and China throughout the year. For the Chinese economy, the summit offers tactical relief but no structural shift. The continuation of the trade truce prevents renewed escalation and preserves the current effective tariff rate on Chinese goods at around 29%, based on our estimation in late February, 0.1% lower than pre-ruling of the IEEPA. While the US granted approval for Nvidia’s H200 chips to China, a symbolic positive for China’s AI sector, reports indicated that China has yet to finalise any order. Meanwhile, US export controls on cutting-edge chips remain firmly in place. US concerns over critical minerals supply were addressed at the summit, but no detailed resolution has been announced at this point. For equity investors, we think the appropriate posture is constructive but selective. Sector-wise, the technology and AI complex remains the most asymmetric opportunity, and we want to continue highlighting the opportunities that come alongside China’s industrial resilience. Please refer to the full report for details about the event and our investment view. “Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio. “Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio. “Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/trump-xi-summit-managed-rivalry-helps-stabilise-expectations/

2026-05-18 08:05

Key takeaways The GBP has remained resilient within its one-year range despite multiple market shocks. Cyclical support should persist, though further GBP upside may be capped by current market pricing. Key downside risks are a prolonged closure of the Strait of Hormuz and any credible weakening of UK fiscal discipline. The GBP has remained relatively steady, with GBP-USD trading within its 1-year range (Chart 1) even as markets faced several shocks. This resilience has been supported by a mix of stronger global risk sentiment, favourable interest rate differentials (Chart 1 again), and tighter GBP liquidity conditions via the Bank of England’s (BoE) balance sheet reduction, even as geopolitical and UK political risks have continued to build. Geopolitical developments in the Middle East have been a key test. While GBPUSD has held up so far, uncertainty remains, particularly around the risk of disruption to Gulf commodity supplies. A prolonged closure of the Strait of Hormuz could trigger a broader move into “safe-haven” assets, likely supporting the USD and putting downward pressure on the GBP. Domestically, political uncertainty has also resurfaced, with Prime Minister Sir Keir Starmer reportedly facing increasing pressure from within the Labour Party (The Times, 12 May). Confidence in the GBP remains closely tied to perceptions of UK fiscal discipline. The last major loss of fiscal credibility, in Autumn 2022, coincided with a sharp rise in UK government bond yields and a marked fall in the GBP (Chart 2), prompting temporary BoE intervention in the gilt market. If credible leadership contenders were to signal a willingness to loosen fiscal discipline, the GBP is likely to come under renewed pressure. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Overall, the two most important risks that could undermine the GBP’s resilience are: (1) an extended closure of the Strait of Hormuz, and (2) any credible shift away from UK fiscal discipline. Even so, we expect the GBP to remain supported through the rest of the year by cyclical drivers, particularly the BoE’s tightening bias, with our economists forecasting two 25bp rate increases in July and September. However, the scope for further GBP appreciation may be limited, as a sizeable portion of this tightening outlook is already reflected in market pricing. In fact, markets are pricing at least two BoE rate hikes by end-2026 (Bloomberg, 14 May). https://www.hsbc.com.my/wealth/insights/fx-insights/gbp-resilient-but-two-key-risks/

2026-05-14 12:01

Key takeaways There have been some signs of resilience heading into the latest shock… …but sentiment has tumbled as price pressures intensify. The BoE is focused on the risk that this latest bout of inflation becomes embedded in wages. The UK economy reported the fastest pace of growth since April 2025 in the three months to February. That means the UK had a firm base heading into the latest period of uncertainty. In fact, activity surveys in April continued to report a degree of demand momentum. The manufacturing sector PMI jumped to 53.7, bolstered by new order growth, while the services sector reported higher business activity with a PMI of 52.0. However, reports of inventory accumulation ahead of expected supply disruption likely overstate activity momentum. Retail sales demand was also flattered by a degree of panic buying of motor fuel, +3.2% m-o-m in March, while overall, retail sales volumes excluding fuel grew a meagre 0.2% m-o-m. Elsewhere, consumer confidence fell further in April, taking sentiment to its lowest level in more than two years. It’s no surprise that facing another inflation shock has left consumers particularly cautious about the future state of the economy, and their own personal financial situations, for the latter, the net balance fell back negative. Savings intentions also rose, new-buyer enquiries for home purchases fell to their lowest level since August 2023 in March, and medium-term inflation expectations have spiked higher. While the initial volatility across both household and business surveys may subside in the coming months, energy prices and supply disruption will continue to pass through the global economy for a while yet. And early indicators suggest agents have a greater sensitivity to price rises with a degree of pass-through evident despite the prospect of softer demand – see chart. For the Bank of England (BoE), the extent to which the latest price shock translates into domestically driven inflation will determine the policy response. In our view, the risk of any second-round inflationary effects is smaller than in recent years, and at its latest policy meeting, the BoE seemed to agree. Nonetheless, the BoE’s scenarios showed how different assumptions on second-round effects, namely through higher wage growth, would require greater interest rate hikes. Such effects can take well over a year to materialise, but if the central bank were to wait for that, it may need to respond more aggressively than otherwise needed; therefore, hikes sooner to mitigate the risk are more likely. For now, market expectations of rate hikes have tightened financial conditions, meaning the BoE may opt to wait and see, in the hope of greater clarity on the outcome of the Middle East conflict, and to see how households and businesses respond. That being said, unless there is a swift resolution to the conflict and a reopening of the Strait of Hormuz, we expect the BoE will need to raise Bank Rate in the summer. The rate of inflation is set to accelerate, and with households and businesses more sensitive to higher prices, we think policymakers are likely to opt to lean against the risk that higher inflation now becomes embedded within household and business price expectations. https://www.hsbc.com.my/wealth/insights/market-outlook/uk-in-focus/some-demand-resilience-but-price-pressures-intensify/

2026-05-11 08:04

Key takeaways “Risk-on” currencies gained notably against the USD amid improved market sentiment. Rate hikes may also have supported the AUD and NOK. In our view, a sustained JPY recovery likely needs stronger fundamentals beyond FX intervention. So far this quarter, “risk-on” G10 currencies, such as the AUD, NOK, and NZD have outperformed against the USD (Chart 1), helped by renewed optimism around a potential de-escalation of tensions in the Middle East. In addition to the broader shift in risk appetite, both the AUD and NOK appear to have benefited from domestic policy developments. On 5 May, the Reserve Bank of Australia (RBA) delivered a third consecutive 25bp rate hike, taking the policy rate to 4.35%, in line with market expectations. This keeps the RBA an outlier among G10 central banks (Chart 2). Our economists expect the RBA to remain on hold in a “wait-and-see” mode; however, further domestic fiscal support could increase the likelihood of additional tightening. Data as of 7 May 2026 at 18:00 HKT Source: Bloomberg, HSBC Source: Bloomberg, HSBC The Norges Bank surprised markets on 7 May by raising its policy rate by 25bp to 4.25%, marking its first hike since 2023. As the Norwegian central bank indicated that its policy outlook has not changed materially, our economists view a prolonged hiking cycle as unlikely. In contrast, regional peers, including the European Central Bank, the Bank of England and the Riksbank, still adopt a wait-and-see approach. While recent price action is broadly consistent with these developments, it is important to monitor any sustained energy disruption that could trigger a renewed “risk-off” shift and strengthen the USD. Meanwhile, the JPY has been among the weakest G10 performers quarter-todate (marginally ahead of the USD), despite potential support from FX intervention. While neither Japan’s Ministry of Finance nor the Bank of Japan (BoJ) has confirmed any recent action, we believe USD-JPY may stay capped over the near term. That being said, a more durable JPY recovery will likely require stronger underlying fundamentals, most notably further BoJ rate hikes and lower oil prices (see FX Viewpoint Flash – JPY: FX Intervention? for details). https://www.hsbc.com.my/wealth/insights/fx-insights/risk-on-rally-but-questions-remain/