What happened last week?
In the U.S., the recently released Fed minutes revealed a cautious stance on future rate hikes. Officials unanimously emphasized a meticulous assessment and substantial progress in curtailing inflation. The decision to maintain rates garnered widespread support, signifying a commitment to restraining the economy until a sustained move towards the 2% inflation goal is observed. Notably, concerns about rising bond yields and the acknowledgment of uncertainty in financial conditions maintained a cautiously hawkish tone. Market expectations anticipate an almost full 1% rate cut in 2024, with the first rate cut projected for June 2024. Across the Atlantic, ECB minutes highlighted the readiness for additional hikes based on ongoing assessments, although economic contraction is causing concerns about a potential recession and uncertainties such as geopolitical events. Despite these concerns, the ECB remains conservative about rate reductions, expecting inflation to return to the 2% target in H2 2025. Similar to the U.S., the market anticipates the first rate cut by the ECB in June 2024. In the UK, Bank of England's Chief Economist, Huw Pill, notes elevated levels of services price inflation and pay growth. While avoiding comments on interest rates, he emphasizes the importance of persistently tight monetary policy. The recent downgrade of the UK economy's supply capacity has significant implications for the bank's approach. Pill anticipates a fall in inflation but deems it still too high. The market gives low chances for another hike from here, while a rate cut at the end of 2024 is expected.
EM bonds demonstrated positive performance over the week, driven by tighter credit spreads and a weakening US Dollar. Both EM corporate bonds and EM local currency bonds gained +0.3%, while EM sovereign bonds saw an increase of over 1%. In Argentina, Javier Milei secured the presidency with 55.8% of the votes in the runoff, compared to 44.2% for Sergio Massa. The new government is set to take office on December 10, leading to a remarkable surge of more than 20% in Argentina bonds. YPF bonds also experienced a sharp rebound, fueled by plans for the privatization of the state energy company under Milei's administration. In China, property bonds saw a significant increase as the Chinese regulator is developing a "white list" of developers eligible for support in the form of bank loans, bond financing, and equity financing. This move eased concerns in the sector. Furthermore, China is contemplating unprecedented support for builders, including unsecured loans. The potential allowance for banks to offer unsecured short-term loans to qualified developers is a notable development. In Turkey, the Central Bank unexpectedly raised its key interest rates by 5% to 40%, continuing efforts to combat high inflation with a more conventional monetary policy. While the currency remained relatively stable, the 5-year Turkey CDS hit the lowest level since March 2021.