What happened last week?
As central banks navigate the evolving economic landscape, their policies reflect a delicate balance between inflation control and economic growth. The upcoming FOMC meeting is expected to see the Federal Reserve maintain its current monetary stance, as declining inflation coupled with a strong economy and job market allows for a measured approach to rate adjustments. The Fed's focus is also shifting toward managing the end of quantitative tightening, with the market pricing in a less than 50% chance of a rate cut in March and anticipating the first cut in June among more than five cuts for 2024. Across the Atlantic, the ECB has decided to hold interest rates steady, emphasizing the need for current rates to persist for an extended period. This decision comes against the backdrop of dampened demand contributing to a decrease in inflation and a moderate positive outlook on Eurozone inflation. With the market now seeing a 70% chance of a rate cut in April and nearly six full rate cuts this year, the ECB's deposit facility rate could drop to 2.5% by year end. In the UK, the BoE is expected to keep its key rates steady, despite a substantial revision in the UK's inflation outlook. With inflation now projected to return to the 2% target by summer 2024, the market anticipates the first rate cut in June. This earlier-than-expected return to the inflation target could significantly influence the BoE's policy direction. Meanwhile, the BoJ maintains its current rates, with Governor Kazuo Ueda preparing for an earlier end to yield-curve control and negative interest rates. The BoJ’s recent Outlook Report indicates a rising likelihood of achieving its 2% inflation target, acknowledging positive wage-price cycle developments. Ueda’s comments hint at a continued accommodative policy even after exiting the current framework, signaling a cautiously optimistic stance towards reaching the inflation target.
Emerging Markets (EM) are showing buoyancy, particularly in corporate bonds where spreads have tightened to levels not seen since before the pandemic. The Bloomberg EM Corporate Bonds Index slightly rose by +0.3% over the week, while EM sovereign bonds held steady. Key to this uptrend is China's monetary policy easing; the People's Bank of China (PBOC) plans a 50bps Reserve Requirement Ratio (RRR) cut soon, injecting about CNY 1 trillion into the economy. Additionally, the PBOC has reduced loan refinancing and rediscounting rates for targeted sectors, complementing broader efforts to support economic growth. In Latin America, Brazil's record bond offering of $4.5 billion signifies a vibrant market, with corporate debt issuance gaining momentum. This surge in bond sales from firms like Codelco, America Movil, and Cosan suggests a strong year for corporate debt in the region. With Banco Santander SA forecasting a doubling of sales from 2023's $44 billion, the early weeks of 2024 have seen a substantial increase in international bond issuance, eclipsing last year's figures. Turkey's Central Bank's recent rate hike of 2.5% to 45% might signal the end of its current tightening cycle, despite ongoing inflation challenges. In sub-Saharan Africa, the Ivory Coast's issuance of a $2.6 billion Eurobond, the first such sale in almost two years, marks a notable return of investor interest to the region.