2025-06-20 12:02

Key takeaways No bazooka stimulus – the aim is to solve structural problems with reforms; watch out for the 15th Five-Year Plan. Household goods consumption is similar to global levels, but services consumption lags; Hukou relaxation can help. US-China talks have eased tensions, though uncertainty remains; China’s exports may face headwinds in 2H. China data review (May 2025) Retail sales grew 6.4% y-o-y in May, the fastest pace since December 2023, driven by the consumer goods trade-in programs. Sales of home appliances rose by 53% y-o-y, communications appliances by 33% y-o-y, and electric vehicles by 28% y-o-y (the latter is based on CPCA data). The Ministry of Commerce reported that the trade-in subsidies helped drive RMB1.1trn in sales this year as of end-May (or cRMB380bn for May, 9% of retail sales) (Xinhua, 1 June). Industrial production (IP) accelerated 5.8% y-o-y in May supported by robust export figures but the domestic story was mixed. Policy support for equipment upgrading and for new growth drivers has kept equipment (+9.0% y-o-y) and high-tech manufacturing (+8.6% y-o-y) elevated. But, sectors along the housing supply chain continued to underperform, as IP growth in non-metal minerals (-0.6% y-o-y) and ferrous metals manufacturing (-4.8% y-o-y) were more muted. The property sector came in a bit weaker with a deeper fall in primary home sales (-4.6% y-o-y) and lower property investment (-12% y-o-y). There continues to be policy tweaks on the margin which can help to prevent the sector from seeing a faster slump. A larger push might still be needed, though the urgency of propping up the property market may fall behind supporting other sectors such as exporters and boosting consumption. Headline CPI inflation dropped 0.1% y-o-y in May as drags from energy prices persisted. However, core CPI inflation picked up to 0.6% y-o-y given ongoing policy support to boost consumption. Meanwhile, PPI inflation saw a deeper fall, -3.3% y-o-y, as deflationary pressures from some excess capacity along the housing supply chain and falling oil prices have yet to abate. Trade uncertainty suggests that domestic demand will remain the key driver to boost price levels. Exports rose 4.8% y-o-y in May as a deeper fall in US exports (-35% y-o-y) was offset by robust exports elsewhere, including ASEAN (+15% y-o-y), Eurozone (+12% y-o-y), and Africa (+33% y-o-y), reflecting China’s moves to diversify more of its exports and supply chains. Imports declined at a faster pace, -3.4% y-o-y in May, as lower global commodity prices and ongoing weakness in China’s property sector have continued to weigh on domestic demand. Top five questions about China’s economy What comes to mind if you are asked to name the most pressing issues facing China’s economy right now? Trade tensions, labour market pressure, a deflationary trap, sluggish consumption, and where is the bazooka stimulus? Let us provide you with some answers. Q1: How fast is domestic consumption recovering? Retail sales surprised on the upside in May, driven in part by government subsidies (e.g. tradein programs). Smaller cities (tier-3 and 4) are faring better than larger ones in terms of retail sales, helped by urbanisation trends. While China’s goods consumption is in line with global levels, services consumption lags. More policies emphasising services demand and structural reforms to support people’s welfare (such are Hukou relaxation) will help sustain consumption. Note: *EV refers to retail volume. HH = household. Source: CEIC, CPCA, HSBC Source: Wind, HSBC Q2: How is the labour market faring? The headline unemployment rate has edged down (5% in May), but there are still pressure points. The youth unemployment rate is c16% and may prove to be sticky, given the rise in the number of graduates and a lack of quality entry level jobs. Low-income and migrant workers have seen a slower pace of income growth relative to both the rest of the population and the pace of GDP growth. However, the government’s increased policy focus and the roll out of measures to support people’s livelihood and boost income growth can help. Q3: Deflation, deflation, deflation: Is there any way out? China is experiencing its longest stretch of contraction in the GDP deflator. While CPI weakness stems from volatile items, core CPI is relatively steady. PPI deflation has been affected by weak demand and excess capacity. Measures to adjust supply and improve profitability may be accelerated, particularly in the industrial sector. Addressing shortfalls in the social safety net and stabilising the labour market are also essential. Q4: Why have exports stayed resilient this year despite the added US tariffs? This comes down to frontloading and trade restructuring. We estimate that China’s direct US exports were largely frontloaded in 4Q last year, spilling over into 1Q ahead of the “Liberation Day” announcements. These exports took a hit in April and May due to the tariffs. The restructuring of trade to other markets, particularly emerging markets such as ASEAN and Latin America, have helped to fill the gap. But other countries may also be facing higher US tariff rates. We expect overall exports to slow in 2H. Q5: Does a China stimulus package depend on US-China relations? We do not expect China to deliver a bazooka stimulus package, as policymakers tend to favour policy workhorses rather than show horses. With trade talks heralding a period of relative calm and domestic activity data holding relatively firm, China will likely continue the steady pace of policy implementation. Source: Refinitiv Eikon Note: *Past performance is not an indication of future returns. Priced as of 19 June 2025. Source: Refinitiv Eikon https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/top-five-questions-about-chinas-economy/

2025-06-19 12:01

Key takeaways The Federal Reserve left interest rates unchanged at 4.25%–4.50%, marking the fourth consecutive meeting without a policy move. While the Fed remains on hold, the updated Summary of Economic Projections (SEP) reflects a shift in tone, with lower growth expectations and higher inflation forecasts across the board. Chair Powell struck a balanced tone during the press conference, acknowledging ongoing risks from tariffs and geopolitical tensions while pointing to areas of resilience in the economy. He emphasised that while the inflation impact has yet to fully materialise, it’s expected to feed through to consumer prices in the coming months. He reiterated that the Committee is prepared to adjust policy as needed but prefers to wait for clearer inflation signals. We maintain a constructive outlook, particularly on US equities, where strong earnings growth, AI-driven productivity gains, and structural re-industrialisation trends remain supportive. In fixed income, we continue to take a selective, high-quality approach amid volatility, while the US dollar remains under pressure as markets focus more on trade policy and fiscal dynamics than near-term Fed moves. We continue to forecast three 0.25% rate cuts to be delivered in September, December and March 2026, bringing the Fed funds target range to 3.50-3.75% by the end of 2026. 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/us-fed-on-hold-awaiting-tariffs-and-fiscal-policy/

2025-06-16 07:05

Key takeaways The ECB cut rates again in June but hinted at a pause… …but the BoC paused rate changes for a second time in a row. US data and events (rather than the rate differential) could be crucial for short-term FX moves. On 5 June, the European Central Bank (ECB) delivered a 25bp cut, bringing the key deposit rate to 2.0%. This was its seventh consecutive cut (and the eighth in total for this cycle since last July). The widely expected decision was “almost unanimous” although one ECB Governing Council (GC) member did not support it. ECB President Christine Lagarde said the central bank was “very well positioned” to navigate the current uncertain conditions that are likely to come from global trade and a jump in fiscal spending in Europe. She also said inflation will remain at the 2% target over the medium term. All this reinforces our economists’ view (and also market expectations) that ECB rates are highly likely to remain on hold at its 24 July meeting. Absent any further deterioration in the economic outlook, June could be the last cut, in our economists’ view. EUR-USD jumped after the announcement, within touching distance of key resistance at 1.15, albeit briefly. This could be explained by the looser ties between FX and the rate differential over recent weeks (Chart 1). Source: Bloomberg, HSBC Source: Bloomberg, HSBC Like the EUR, the CAD also remains significantly stronger against the USD than the rate differential would typically imply (Chart 2). The CAD, after underwhelming in 1Q25, has rallied c5.2% against the USD so far this quarter (Bloomberg, 5 June 2025). Relief that many Canadian exports were spared the headache of higher tariffs has helped the CAD so far. A grind higher in Canadian rate expectations for year-end 2025 may also have helped the currency. Indeed, the Bank of Canada (BoC) decided on 4 June to hold rates steady at 2.75% for a second straight meeting. This was a dovish hold, however, as the BoC noted that the outlook for both the labour market and growth remains weak. Policymakers also hinted that if tariff risks materialise, the BoC could look to cut rates in 3Q25. Markets see a 25bp cut by the BoC in September (Bloomberg, 5 June 2025). With the case building for a summer pause by both the ECB and the BoC, EUR-USD and USD-CAD will take more direction from US data and events. There is likely to be ongoing asymmetry for the USD to US growth, as the currency’s reaction shows more sensitivity to weaker-than-expected readings compared to stronger numbers. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-and-cad-a-summer-pause/

2025-06-16 07:04

Key takeaways The Fed is widely expected to leave the funds rate unchanged at its meeting this week. What Chair Powell says and how the Fed factors US import tariffs into its updated forecasts will be the focus. US technology dominates the artificial intelligence revolution. But recent advances by Chinese AI firm DeepSeek have shown China to be a serious competitor. Asia’s investment in renewable energy is slowing as its governments struggle to balance decarbonisation objectives with delivering reliable and more affordable power sources. A scarcity of traditional funding options is adding to the headache. Chart of the week – EM central banks in easing mode Recently, the Reserve Bank of India (RBI) delivered front-loaded policy easing with a surprise 0.50% rate cut and liquidity easing through lower reserve requirements. Falling inflation and a broadly dollar-bearish backdrop have opened the door for the RBI to deliver bold moves this year – with a quick, cumulative 1% rate cut, substantial liquidity infusions, and multiple relaxations of macro-prudent measures. Big moves like this aim to speed up policy transmission through the banking sector and boost credit growth, helping to bolster consumer spending and capital investment. The measures are likely to support local stocks too, especially in rate-sensitive sectors like real estate and some financials. It comes as Indian equities have been under pressure this year amid heightened global policy risks. They’re also likely to lead to further spread compression on rupee-denominated corporate and supranational bonds, which offer attractive spreads over Indian government bonds. But this isn’t just an India story. A number of emerging market central banks have taken decisive policy action recently – as the US Fed continues to hold. Among them have been Mexico, Indonesia, Poland, South Africa, and Egypt. In some cases, countries have been able to act because their fiscal outlooks are improving. But the critical factor has been the weaker dollar, as investors reassess its status as a global safe haven. A weaker dollar is an obvious EM positive. It typically eases dollar debt servicing, helps trade, supports capital flows, and boosts returns in stocks and local currency bonds. With many EM economies transforming their macro structures since the “fragile five” phase a decade ago, and amid faltering confidence in American exceptionalism, no wonder investors are paying more attention. Market Spotlight Trading places Over the past decade, emerging market economies – especially in Asia and Latin America – have enjoyed closer integration when it comes to regional trade and banking. The result has been better growth, access to alternative sources of credit, and less volatile government spending. But this closer regional EM integration has come at a time of rising geopolitical tensions that have led to more fragmentation at a global level. This rewiring of global trade linkages is the focus of a new bulletin by the Bank of International Settlements. The BIS research explores how, prior to the 2010s, global trade expanded faster than GDP, but then slowed as geopolitical wrangling intensified. Meanwhile, integration in global banking fell sharply after the financial crisis and didn’t recover much afterwards. But at a regional level, trade and banking integration have continued to progress in emerging Asia and LatAm. According to the BIS authors, these trends – and the economic drivers behind them – have the potential to act as a buffer against geopolitical shocks that lead to global fragmentation. Their encouraging conclusion is that the reinforcing nature of trade and banking means that deeper regional integration in EMs – and the better growth and regional stability that comes with it – is likely to develop. 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 13 June 2025. Lens on… Taking the summer off The Fed is widely expected to leave the funds rate unchanged at its meeting this week. What Chair Powell says and how the Fed factors US import tariffs into its updated forecasts will be the focus. In March, the Fed expected 1.7% yoy growth in Q425 with core PCE inflation at 2.8%. The current Bloomberg consensus figures are 0.9% and 3.3% respectively, giving some sense of how the Fed’s numbers could change. The March “dot plot” implied two rate cuts in 2025, in line with current market pricing, which suggests investors have interpreted higher expected inflation and lower expected growth as broadly offsetting. The latest data don’t argue for the Fed to guide market rate expectations in one direction or the other. Activity and survey data have been mixed. The labour market is cooling gradually but remains resilient. Importantly, March, April, and May inflation data have been softer than expected, implying that, absent tariffs, underlying price pressures are reasonably well contained. Modest policy easing later in 2025 appears appropriate. One catch is that a data-dependent Fed risks intensifying the sensitivity of the macro system to news, which could spur US market volatility. Artificial intelligence, real profits US technology dominates the artificial intelligence revolution. But recent advances by Chinese AI firm DeepSeek have shown China to be a serious competitor. A new research by some Equity Research teams finds that while the US is still likely to lead on AI innovation – driven by Silicon Valley start-ups and Magnificent 7 mega-caps – China could lead globally in engineering optimisation, production, and widespread commercialisation. With AI reasoning models now able to reach potentially billions of users, some investment specialists believe the AI race is no longer just about who builds the smartest machine, but who gets it to consumers at the lowest cost. And for investors, there are several implications. One is that software firms will probably lead the next stage of the AI investment cycle, as they work to get AI apps into the hands of users. Second, the influence of DeepSeek is likely to give emerging Asia inherent advantages in monetising AI tech, and that will attract increasing investor attention. As the cost of AI compute falls, the impact should be seen in a broadening-out of profits growth to emerging Asia and beyond – as the profits edge enjoyed by US tech over the past decade erodes. Energising Asia Asia’s investment in renewable energy is slowing as its governments struggle to balance decarbonisation objectives with delivering reliable and more affordable power sources. A scarcity of traditional funding options is adding to the headache. In the past, infrastructure has been dominated by large country-scale projects. But the current energy transition requires more localised investments, typically ranging from USD40 million to USD250 million. This shift has created a gap, because banks are geared towards larger deals. But the good news is that private credit, which is well-suited to renewable energy infrastructure because of its flexibility, is proving a successful alternative. Microgrids across the Philippines – combining solar panels, battery storage, and smart distribution tech – are a good example of successful privately-financed energy projects. With private credit delivering superior returns to both credits and stocks over time, and interest rates and inflation expected to remain high compared to historical levels, investor appetite for these kinds of cash-flow-generating assets with inflation protection is likely to persist. 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. 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 13 June 2025. Key Events and Data Releases Last week The week ahead Source: HSBC Asset Management. Data as at 7.30am UK time 13 June 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 struggled to make headway as investors weighed the outcome of the latest US-China trade negotiations, US inflation data, and geopolitical concerns. Oil and gold prices climbed, while the US dollar weakened further against major currencies. Core government bonds found support from tame CPI data and a solid 30-year Treasury debt auction. In equity markets, US stocks rose but EU-US trade tensions weighed on the Euro Stoxx 50, with the DAX the main casualty. Japan’s Nikkei 225 was little changed ahead of the BoJ meeting. South Korea’s Kospi led Asian markets, building on post-election gains, whereas India’s Sensex and China’s Shanghai Composite fell. In Latin America, Brazil’s Bovespa index rebounded after recent declines. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/em-central-banks-in-easing-mode/

2025-06-16 07:04

Key takeaways We expect the Bank of England’s Monetary Policy Committee to keep Bank Rate on hold at 4.25% on 19 June. However, weak wage data and next week’s inflation print may allow for an interest rate cut in August. We see downside risk for GBP-USD ahead but broad USD weakness could limit the impact. On 19 June, the Bank of England (BoE) will announce its latest rate decision and publish its monetary policy minutes and statement: HSBC economists expect the Committee to keep Bank Rate on hold at 4.25%. The guidance was unchanged in May, and is likely to remain unchanged in June, namely that “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further”. The bigger question is what happens at the next meeting, on 7 August. Although the Committee cut interest rates by 25bp in May, the meeting minutes suggested that they were not far off voting for a hold: two members voted for this, with three more saying they might have done so were it not for the global trade situation. Arguments in favour of a hold are that financial volatility has receded, the UK has struck three recent trade agreements (with the US, the EU, and India) and 1Q GDP was decent, at 0.7% q-o-q. On top of that, and perhaps more importantly, the April inflation number surprised on the upside. The headline print of 3.5% was 0.1ppt above the BoE’s forecast, while the services print of 5.4% was 0.4ppts higher. However, April’s labour market report, closely watched by the BoE for signs of domestic inflation, showed private sector wages slowing to 5.1% y-o-y in April (vs consensus of 5.3% and from 5.5% in March), the slowest pace since February 2022. The unemployment rate also ticked higher to 4.6%, from 4.5%. Meanwhile, April’s GDP fell 0.3% m-o-m, more than consensus of -0.1% and down from 0.2% previously. Before voting next week, the Committee will see May’s inflation print. We think the data is unlikely to sway June’s decision to keep rates on hold, but it may set the tone for a close call in August. Our base case is that the wage data and next week’s inflation print will allow for an August cut, but like the rest of the market, we will be watching keenly for clues in the language next week. Given our forecast for the BoE to cut interest rates to a terminal level of 3.0% by 2Q26, compared to 3.51% priced by the market, we think further job market weakness in the coming months could lead the market to price in more cuts. If this happens, GBP would likely struggle vs both USD and EUR. However, given that trust issues and the de-dollarisation theme continue to undermine the USD, downside GBP-USD moves may prove somewhat more limited. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/gbp-downside-from-labour-market-weakness/

2025-06-10 08:05

Key takeaways Progress on trade deals calmed the tumbling survey data in May, but the hard data may be starting to soften… …at a time when fiscal concerns have revived and the future course of US import tariffs hinges on the courts of appeal… …adding to challenges for businesses and monetary policy. US trade and fiscal policy has dominated the global narrative over the past month. Progress on framework trade deals with the UK and, more importantly, China, following on from the 90-day pause on the highest reciprocal tariffs announced on 9 April, calmed some of the fears about worst case scenarios on US tariffs. This, in turn, helped revive equity markets, while the May business and consumer confidence survey data stabilised or improved after the dismal April readings. Source: Macrobond Source: Macrobond Tariff challenges Trade uncertainty still reigns though, following the US Court of International Trade (CIT) ruling that the US President had overstepped his authority by imposing reciprocal tariffs globally using the International Emergency Economic Powers Act (IEEPA). While the US administration immediately lodged an appeal and won a temporary ‘stay’ on the CIT’s order to remove the IEEPA tariffs, US importers and consumers, as well as foreign exporters, cannot know whether some tariffs will be sustained or cancelled after the appeal, or even increased post 9 July. Debt concerns If there is a loss of tariff revenues, which rose in April, it will have no direct implications for the so-called Big Beautiful Bill (BBB) Act as there was no explicit connection to tariff revenues in the Republican budget reconciliation package now in the Senate. However, the latter was already a major factor in Moody’s May downgrade of the US sovereign credit rating which coincided with heightened market concerns over the hefty budget deficit and much higher debt projections implied by the BBB. The US 10-year yield hit 4.6% and the 30-year hit 5%, keeping US mortgage rates high. Divergent data Yields have now edged lower again amid a few signs that the hard US data, which have generally still been more resilient than surveys, may finally be softening a touch. Non-farm payrolls increased at a slightly slower pace in May, while unemployment remained unchanged at 4.2%. Although layoffs in the US remain low, the rate of hiring has slowed. In Europe and in parts of Asia Q1 GDP was stronger than expected, helped by frontloading ahead of tariffs, but Q2 industrial data are mostly showing signs of softening. Source: Macrobond Source: Macrobond. Falling inflation US inflation releases for April were lower, but the Federal Reserve will remain wary of inflation expectations as tariff effects feed through: early signs of rising input cost were evident in the US manufacturing and services PMI/ISM data and May wage data were higher. Eurozone inflation fell below 2% in May as Easter effects unwound and lower energy prices and a stronger euro should mean it falls further, even if global food prices (dairy and meat) continue to edge higher. The European Central Bank (ECB) is in a good place after cutting interest rates to 2%, which could prove to be the last cut of the cycle, but we still see disinflationary effects against a backdrop of already low inflation driving policy rates lower across Asia, except Japan. Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus Source: LSEG Eikon, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/macro-monthly/ongoing-trade-and-debt-uncertainties/