Wall Street Highlights – Macro
MS contend that the sharp decline in 1-month HIBOR in May 2025—from 3.98% on May 5 to 0.59%, a drop of nearly 340 basis points—is temporary rather than a structural shift. The resulting HIBOR-Fed funds rate spread is the widest since 1988. MS attribute this sharp move to three main factors: a significant liquidity injection by the Hong Kong Monetary Authority (HKMA), reduced broad USD selling pressure, and a decrease in HKD demand from equity inflows. Specifically, the HKMA injected HK$129 billion into the market between May 2 and May 6 to maintain the currency band as USD/HKD touched 7.75, marking an unprecedented pace of liquidity provision. This occurred even as Hong Kong banks’ HKD loan-to-deposit ratio had been steadily declining since June 2023, reflecting ample liquidity due to both falling loans and rising deposits.
MS note that despite USD/HKD trending lower from February to early May 2025, 1-month HIBOR remained range-bound until this sharp drop, diverging from FX performance. USD selling pressure eased, as demonstrated by the stabilization of USD/TWD and a rebound in the broad USD trade-weighted index and DXY after May 7, further reducing HKD demand. Meanwile, Southbound Stock Connect inflows into Hong Kong equities slowed sharply in May to just US$2 billion, compared to US$20–21 billion per month from February to April, further contributing to easy HKD liquidity.
MS expect this low level of HIBOR will not persist, forecasting a retracement in the coming months as excess liquidity is absorbed by several factors, including upcoming dividend payments by Hong Kong-listed companies, quarter-end funding needs, and increased bond and equity issuance. MS also highlight that if USD/HKD hits 7.85, the upper end of the currency band, the HKMA may intervene by selling USD for HKD, thus absorbing excess liquidity and supporting a HIBOR rebound. An ad-hoc increase in Exchange Fund Bills & Notes (EFBN) issuance could also help tighten liquidity. Notably, MS point to concentrated dividend payout dates for Chinese companies listed in Hong Kong—specifically May 30, June 25, June 30, July 10, and July 25—as key moments that could draw down liquidity.
On the macroeconomic front, MS maintain their view that Hong Kong’s real GDP growth will dip by 40 basis points to 2.1% in 2025 before edging up by 10 basis points to 2.2% in 2026. MS emphasize that the recent sharp HIBOR drop is unlikely to provide meaningful support to the economy or offset the negative impact of US tariffs. A more sustained decline in rates is not expected until 2026, when MS forecast 175 basis points of Fed rate cuts, which should help stabilize the property market, reverse the negative wealth effect from falling housing prices, and support investment.
Regarding sector impacts, MS see the property sector benefiting in the short term from the effective mortgage rate drop from 3.5% to 2%, which could create positive carry for home buyers and at least a 5% net profit improvement for many developers with floating debt. However, MS caution that these positives may be transitory if HIBOR rebounds. MS favor stocks such as SHKP, Henderson, and Kerry in this context. For banks, a temporary HIBOR decline may have a modest, low single-digit basis point impact on quarterly net interest margins, which can be mitigated by trading opportunities. Should rates fall more sustainably in 2026, domestic banks’ margins may come under greater pressure, with loan growth remaining soft in 2025 but expected to pick up in 2026. MS retain a preference for international banks such as HSBC(0005.HK) and Standard Chartered(2888.HK), given their diversified business models and resilience to lower rates. .