What happened last week?
This week, the narrative was shaped by key comments from Federal Reserve members, most notably from Governor Christopher Waller, who indicated that the Fed might consider reducing interest rates later this year if inflation does not show a significant rebound. Waller's perspective, pointing to strong economic activity and labor markets along with a gradual decrease in inflation towards the 2% target, suggests a more measured approach to rate adjustments. This cautious stance resonated with the market, leading to a recalibration of expectations: the anticipation of rate cuts in 2024 has been dialed back from six to five, with the first cut now eyed for May. Across the Atlantic, the European Central Bank's outlook diverges. Robert Holzmann, known for his hawkish views, cast doubt on the likelihood of rate cuts in 2024, considering the current economic and inflationary landscape and not discounting geopolitical tensions in the Middle East. This sentiment was echoed by ECB's Simkus, who expressed skepticism about imminent rate cuts, foreseeing them to potentially start around summer. Christine Lagarde, aligning with other ECB policymakers, is also pushing back against market expectations of near-term rate reductions, emphasizing the crucial role of wage trend data in informing policy decisions. Consequently, market expectations for ECB rate cuts have cooled, with the projection for 2024 now standing at five cuts, a notable decrease from the more than seven anticipated at the end of last year. In the UK, the unexpected rise in December's inflation to 4%, driven by sectors like alcohol, tobacco, and clothing, has prompted a re-evaluation of the Bank of England's rate cut timeline. This uptick, the first in 10 months, has shifted market bets, pushing the forecast for the first rate cut from May to June 2024, underscoring the fluid nature of economic forecasting and the constant interplay of various market forces.
In the Emerging Markets (EM) sector, corporate debts are showing significant strength, mirroring the positive trends seen in the American Investment Grade (IG) market. EM corporate bond spreads (OAS) have tightened to 270bps, the lowest since the COVID-19 crisis began. Despite this positive trend in spreads, the overall performance of EM bonds varied. The Bloomberg EM Sovereign Bonds Index experienced a 1% decline over the week, influenced by the global rise in interest rates. Conversely, the Bloomberg EM Corporate Bonds Index fared slightly better, ending the week with a modest loss of 0.3%. Local currency bonds in EM markets also faced challenges, recording a loss of 1%. In a notable development, China is exploring the issuance of 1 trillion yuan ($139 billion) in special sovereign bonds. This rare fiscal move aims to boost the economy by funding key projects in sectors such as food, energy, and urbanization, reflecting a strategic effort to stimulate growth and counter deflationary pressures. Ping An Bank’s initiative to support 41 property developers, including prominent companies like Longfor and Vanke, highlights China's concerted efforts to stabilize its real estate sector. JPMorgan's decision to exclude Egypt from its local-currency bond indexes due to foreign exchange shortages signifies the economic challenges the country faces, including severe dollar scarcity and repeated currency devaluations since early 2022. Furthermore, Moody’s downgrade of Egypt’s credit outlook to negative highlights the increasing risks to the country's financial stability.