2025-09-02 07:04
Key takeaways Weaker-than-expected US payroll numbers, an elevated real policy rate and Fed Chair Powell’s comments at Jackson Hole reinforce market expectations for rate cuts to resume in September. Investors are likely to move cash to bonds to lock in higher yields. The falling correlation between stocks and bonds also means that quality bonds are better diversifiers against equity market volatility. We upgrade Global and US investment grade to overweight. In the US, the headwinds of growth moderation, tariff-driven goods inflation and elevated valuations should be offset by Fed rate cuts and AI-led innovation, with tax cuts and deregulation providing further support for equities. We remain overweight on global equities, with a preference for the US and Asia, and maintain diversification through multi-asset strategies. In addition to the high US tariffs of 50%, India is also facing short-term cyclical headwinds, leading to slowing earnings momentum and continued foreign investment outflows. We therefore downgrade Indian equities to neutral and prefer China and Singapore in Asia. Government support for AI adoption and domestic consumption, along with a renewed focus on addressing the overcapacity issue, is boosting market optimism for Chinese equities. Defensive qualities and an attractive dividend yield bode well for Singapore’s equity market. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/moving-cash-to-bonds-ahead-of-fed-rate-cuts/
2025-09-01 12:02
Key takeaways Most EM currencies have lost upward momentum lately, as markets are looking for clues on the Fed’s rate path… …but the Fed has finally signalled an exit to its rate hold. EM currencies are likely to appreciate in this upcoming Fed’s rate cutting cycle, in our view. Many emerging market (EM) currencies have lost appreciation momentum so far in the third quarter, with most Asian currencies surrendering some earlier gains (Chart 1). This is partly because the US Dollar Index (DXY) has stabilised, rather than falling further, as markets look for clues on the Federal Reserve’s (Fed) policy path. Going forward, the Fed’s policy is likely to be a key driver for the FX market. At the Fed’s annual economic symposium in Jackson Hole in August, Chair Jerome Powell signalled a rate cut soon. Fed funds futures are now pricing in rate cuts of c55bp by the end of the year, with a c88% chance of a 25bp cut at its 16-17 September meeting (Bloomberg, 28 August 2025). Relatedly, the potential for a more dovish tilt in the composition of the Federal Open Market Committee (FOMC) is also catching market attention. Stephen Miran (who authored the ‘Mar-a-Lago Accord’ which laid out a framework to weaken the USD) has been nominated to temporarily fill in for Adriana Kugler (who stepped down from her position as a governor on 8 August but whose term was due to end in January 2026) and he may be confirmed by the Senate just in time to vote at the FOMC’s September meeting. Meanwhile, US President Trump announced on 25 August (US time) that he is removing Fed Governor Lisa Cook. Cook challenged this order in court and in the meantime, the Fed has deferred a decision on her status (Bloomberg, 28 August 2025). If there are growing market concerns about the Fed’s independence, the USD could take a hit. Our base case is for the USD to weaken modestly over the coming months. Source: Bloomberg, HSBC Source: Bloomberg, HSBC In our view, EM currencies could be stable or even outperform in the upcoming Fed’s rate-cutting cycle. First, the US economy is slowing but not in a recession, with Bloomberg’s US recession probability forecast currently standing at c35% (Chart 2), and so there will probably be limited negative spillover impact to EM growth, with rather contained “safe haven” demand for the USD. Second, many EM central banks have been cutting rates and some EM governments have been rolling out more supportive fiscal measures and embarking on market reforms in response to the US’s imposition of tariffs. These measures could support EM growth and currencies. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/em-currencies-when-the-fed-resumes-cutting-rates/
2025-08-25 12:02
Key takeaways There is limited scope for the quarter-to-date underperformance of the JPY and the NZD to extend… …which the JPY would be supported by converging USJapan rates, amongst other domestic developments… …while positive factors for the NZD may be delayed. So far this quarter, the NZD is the worst-performing G10 currency, with the JPY coming in second to last (Chart 1). The question arises as to whether or not this trend will continue. In our view, there is scope for the JPY to strengthen against the USD in the months ahead. Cyclical drivers, in particular yield differentials, have started to become more dominant in the FX market. Coming on the heels of a likely resumption of the Federal Reserve (Fed) easing at its 16-17 September meeting, yield differentials between the US and Japan would probably narrow, which points to USD-JPY downside (Chart 2), especially if the Bank of Japan (BoJ) turns more hawkish. Our economists expect the BoJ to deliver its rate hike at its 29-30 October, while markets only priced in c50% for this to happen (Bloomberg, 21 August 2025). In addition, less Japanese political uncertainty and less angst about the future fiscal path should help the JPY. Source: Bloomberg, HSBC Source: Bloomberg, HSBC As for the NZD, we turn cautious over the near term. The Reserve Bank of New Zealand (RBNZ) cut its policy rate by 25bp to 3.00% at its 20 August meeting, with a 50bp cut discussed. The RBNZ's policy rate projection was also revised lower to trough at 2.55% in 1Q26 (previously 2.85%), weighing on the NZD. External factors, like lacklustre emerging Asian currency performance, have also turned less favourable, pausing the rise in NZD-USD. However, our cautious near-term stance on NZD-USD does not change our optimistic medium-term stance, where we think monetary and fiscal easing globally should provide a cushion for downside growth risks. The NZD is likely to be supported by a stronger terms of trade outlook, more direct exposure to potential fiscal measures from China, and more consistent bond inflows – these considerations are sitting in the back seat at the moment. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/jpy-and-nzd-underperformance-to-continue/
2025-08-25 12:02
Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-central-banks-in-focus/
2025-08-20 07:04
Key takeaways The impact of the S&P ratings upgrade, expected GST tax cuts, and geopolitical developments affecting tariff rates, are intrinsically interlinked, in our view. The fiscal projections backing the ratings upgrade will depend on how GST tax cuts are funded, which in turn will depend on India’s growth prospects amid elevated tariffs. Even as we await clarity on tariffs and taxes, it will be worth monitoring developments on trade and domestic reforms, which seem to be back in focus. We’ve seen it all in the last 72 hours. An S&P upgrade after 18 long years of waiting. A promise of Goods and Services Tax (GST) rate cuts by Diwali, bringing cheer to consumers. And important geopolitical meetings between Presidents Trump and Putin, and then Trump and President Zelenskiy, which could have implications for the 25% secondary tariff levied on India for buying Russian oil. Where does this leave Indian markets and the economy? While analysing them all, we realise that, in terms of the impact, the three developments are closely interlinked. S&P upgrade: What impressed the agency? After revising India’s outlook to positive last year, S&P Global Ratings upgraded India’s sovereign credit rating to BBB from BBB-on 14 August. This move may not just boost sentiment, but also help lower the risk premia and borrowing costs in the economy. The long wait ended, thanks to a much-improved economic outlook according to S&P. It highlighted India’s fiscal discipline since the pandemic, with the combined fiscal deficit falling to 7.3% of GDP in FY26 from 13.4% at the pandemic’s peak. The quality ofexpenditure has also improved. Meanwhile, inflation has been contained despite exogenous shocks, and the current account deficit remains low despite the rise in public capex. However, that was in the past. Looking ahead, it is clear that S&P has based its big move on two key projections. That GDP growth will average 6.8% over the next three years. In addition, the consolidated fiscal deficit will fall further from 7.3% now to 6.6% by FY29, marking a 0.7ppt consolidation in three years. These, together, will help lower public debt (from above to below 80% of GDP). While there is no immediate threat of the ratings upgrade being reversed if the projections do not materialise, for the sustainability of current ratings and future upgrades, it is worth asking what it will take for S&P’s projections to be correct. Here we pass on the baton to the GST tax rate cuts, for that could affect S&Ps desire for 0.7ppt fiscal consolidation over three years. GST tax cuts: Who foots the bill? On 15 August, Prime Minister Modi announced an overhaul of the GST tax regime. Slashing rates across a range of products, by moving the majority of the items in the 12% and 28% slabs to the 5% and 18% slabs, respectively. In addition, collapsing a system of four key GST rates (5%, 12%, 18%, and 28%) into two main rates (5% and 18%) alongside a special rate (of 40% for about seven sin goods and luxury vehicles). The compensation cess is also likely to be subsumed by the 40% special rate. This promises to bring two benefits. Immediate tax cuts could spur demand across products –food, beverages, consumer durables, autos, hotels, cement, building materials, etc. And over time, efficiency gains of moving to a simpler and more predictable tax regime with fewer rates, could raise India’s potential GDP growth over time (though some would say that there is more that can be done on GST reforms, for instance, bringing in petroleum and electricity in the GST fold). So far so good. However, things begin to get complicated when we ask who will foot the bill on tax cuts. Best to pause here to clarify that many of the details on the new GST rates are not yet known and we are developing a possible scenario based on the information we have. We estimate that as some products are moved to lower tax buckets (from the 12% to the 5% bin, and from the 28% to the 18% bin, though a minority may be pushed up from the 12% to 18% or from 28% to 40% too), the cost to the exchequer will be around USD16bn (INR1430bn, 0.4% of GDP). In the GST spirit, this could be equally split between the central and state governments. The centre has other revenue sources to count on, but states do not have as many options. They may not agree to the revenue hit. Their complaint could be that they already follow the FRBM Act whereby they must keep the fiscal deficit below 3% of GDP. Now following the GST rules and cutting tax rates could be a difficult task, unless they cut other important expenditure like capex. If the central government then comes up with a compensation plan to handhold states for a few years, the funds would have to be made available. If these funds are generated by a GST tax hike in say, some luxury goods or suchlike, that would go against the efficiency principles of having fewer GST rates. This is important because the GDP growth boost from efficiency gains could then be compromised. And the expectation of high tax revenue growth on the back of stronger GDP growth prospects may not materialise. One can point out that losing some efficiency and growth gains temporarily may be a price worth paying for a long-term reform. But that, we think, will be easier to digest if the overall outlook for growth over the short term is buoyant. Is that the case? Tariff talk: Where will it end? The 25% + 25% tariff rates imposed by the US authorities on India’s exports (starting 27 August as of now), have dimmed some of the growth prospects. To recap, c20% of India’s overall exports go to the US, valued at 2.2% of GDP. Thankfully a-third of these exports remain exempt from these tariffs. Yet, we calculate that a 25% tariff could lower growth directly by 0.3ppt over a year, and with a 50% tariff, the growth drag could rise to 0.7ppt. The second round and indirect impact of the elevated tariffs could be meaningful, if not more hurtful. The main non-exempted items that India sells to the US like jewellery, textiles, and food items, are associated with labour-intensive small firms, and disruption there could impact domestic consumption demand. FDI inflows and corporate capex (at about 12% of GDP) could take a hit if India’s exporting potential comes into question. So will these tariff rates stick? While it is hard to forecast here, recent developments are worth tracking. On the oil penalty, much depends on the ongoing peace talks, where, as per a Bloomberg report (18 August), following meetings with the two heads of state, President Trump has calledPresident Putin, urging him to plan a summit with President Zelenskiy within the next two weeks. On the reciprocal tariff, much depends on the ongoing trade talks between India and the US. On 18 August, the Indian government removed import tariffs on cotton imports, a step that could create fresh room for continued negotiations. Clouds lifting, or just shifting? Putting it all together, if tariffs are eventually lowered, the GDP growth drag could soften too. If the growth outlook improves, it may be easier to digest the short-term disruptions associated with funding the GST rate cuts. If fiscal discipline is maintained despite GST rate cuts, the projections on which India achieved a ratings upgrade, will be upheld. We may have to wait a bit longer to ascertain whether clouds are lifting, or just shifting. In the meantime, it would serve India well to have a growth plan, ranging from fiscal support (incentives for exporters), monetary easing (we believe there is some more room available for rate cuts), to structural reforms. On reforms, now is the time to press ahead with trade negotiations (slashing import tariffs on intermediary inputs, fast-tracking the India-EU trade deal, and being open to FDI especially from China), as well as domestic reforms (more ease-of-doing business deregulation across states, implementing the four labour codes, and stepping up disinvestment). While we await details on taxes and tariffs, it will benefit the economy immensely if this is a start of a string of growth-enhancing reforms. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/clouds-lifting-or-just-shifting/
2025-08-18 12:02
Key takeaways China’s H2 economic policy aims to speed up capacity reduction and roll out more demand-boosting policies. The new ‘anti-involution’ campaign should help enhance productivity and better balance supply and demand. Emphasis on consumption policies to increase goods and services demand could help unlock more growth potential. China data review (July 2025) Retail sales slowed to 3.7% y-o-y in July amidst a notable pullback in auto sales (-1.5% y-o-y). The China Passenger Car Association recently noted that passenger car and EV sales were up in volume terms by 6.3% and 12% y-o-y in July, down from 10.8% and 33.3% in 1H (Yicai, 8 Aug). Also, the third batch of trade-in subsidies was likely deployed only towards late July (Gov.cn, 26 July). Industrial production decelerated to 5.7% y-o-y in July likely owing to the antiinvolution campaign. However, sectors benefiting from ongoing policy stimulus, such as equipment upgrading and incentives to promote technology and innovation, still led the overall growth, e.g., high-tech manufacturing up 9.3%. Property investment dropped 17% y-o-y in July, the deepest contraction since November 2022. Meanwhile, primary residential home sales also fell 7.1% y-o-y in volume terms. Of note, the latest July Politburo meeting and the Central Urban Work Conference had set the tone that advancing urban renewals and increased urbanisation will be the key focus in the longer term. CPI inflation was flat in y-o-y terms in July, largely owing to falling prices of food and energy. However, core CPI continued to improve, rising 0.8% y-o-y, likely helped by the ongoing fiscal push to boost consumption. On the producer side, PPI inflation remained weak in July, dropping 3.6% y-o-y. It will take more time to see impacts from anti-involution campaign. Exports sustained the growth momentum, rising 7.2% y-o-y in July, given a low base from last year as well as continued trade restructuring and related frontloading to emerging markets regions. Meanwhile, imports grew 4.1% y-o-y, helped by ongoing strength in processing imports, while ordinary imports also returned to positive growth. Structural reforms picking up pace Strong 1H growth (chart 1), reciprocal tariff pauses, technology innovations from DeepSeek to innovative drugs, and recent policy momentum around structural reforms have made markets more optimistic and could lead to more stable H2 growth than originally expected. China is also shifting to high-quality growth, focusing on consumption, urbanisation, technology upgrades, and addressing excess capacity. Policy support to accelerate Politburo sets the tone: Policymakers were clear in July’s Politburo meeting (30 July) that supporting growth is still the primary focus. The economic policy in H2 aims to implement structural measures, with capacity reduction set to speed up and large projects and new urbanisation plans to be rolled out in an effort to boost consumption. A larger fiscal push may also include mega infrastructure projects, such as the recent RMB1.2trn Tibet Dam. “Anti-involution” campaign to accelerate: While the anti-involution push may slow short-term growth due to industry consolidation and layoffs, it should lift productivity and improve the balance between supply and demand in the longer run. Unlike the supply side reforms in 2016, China is aiming for a more market-oriented approach to reduce capacity. A series of laws and regulations, such as the Private Economy Promotion Law, have recently been enacted aiming to level the playing field. If these are properly implemented, they will not only deter and penalise anti-competitive behaviour, but also accelerate national market integration. The campaign should also help to lift prices (chart 2). During the prior round of reforms, PPI reverted to positive growth after about three quarters from the launch of the campaign. This time around, the pace may be somewhat slower given the emphasis on the market-based approach. Boosting domestic demand: Like before, policies aimed at lifting demand will be a key element. The new urbanisation plan will serve as the policy cornerstone, focussing on urban renewal programmes, improved urbanisation rates and the building of city clusters. The plan aims to expand affordable housing too, potentially converting existing stock. These largescale longer-term projects will also receive more focus in the upcoming 15th Five Year Plan. China is also maintaining its strategy to enhance high-quality consumption growth. While subsidies for consumer durable goods have been in place since last year, a significant development is that the central government is now providing direct support for services consumption, such as child and elderly care. As urbanisation advances, new urban residents may be more willing to increase their spending, especially with equal access to public services. Source: CEIC, HSBC Source: CEIC, HSBC Source: LSEG Eikon * Past performance is not an indication of future returns Source: LSEG Eikon. As of 13 August 2025, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/structural-reforms-picking-up-pace/
