What happened last week?
Fed President Austan Goolsbee recognized progress in curbing inflation but highlighted challenges, especially in housing inflation. President Thomas Barkin expressed skepticism about a smooth path to the 2% inflation target, citing factors like the partial reversal of Covid-era price spikes. Vice Chair Philip Jefferson emphasized persisting uncertainties linked to pandemic-specific factors. The market anticipates a first cut by May 2024 and a 1% rate cut by end-2024. In Europe, the ECB’s decision to pause rate hikes in October, led by Council member Francois Villeroy de Galhau, is supported by a notable inflation slowdown, affirming effective monetary policy. Villeroy is optimistic about reaching a 2% inflation target by 2025, underscoring the importance of patience. He also noted the positive impact of higher rates on French banks and insurers. Council member Mario Centeno highlighted a swift decline in euro-area inflation, emphasizing persistent financial tightness. Centeno discussed normalizing policy, stressing the need for rates aligned with the 2% inflation goal. The market now implies a first rate cut in April and a 1% rate cut for the entire 2024. Bank of Japan Governor Kazuo Ueda stated discussions on an exit strategy from ultra-loose policy are approaching with the sustained 2% inflation target. Ueda emphasized patience, awaiting a positive wage-inflation cycle, and mentioned the fate of ETF holdings in exit discussions. The market implies a first rate hike by June 2024.
EM corporate bonds showed a modest 1% gain, in line with US Treasuries, as spreads remained largely stable. EM local bonds, buoyed by a weakening US dollar, and sovereign bonds, benefitting from higher duration and reduced concerns over contagion risks in the Middle East, posted a robust 1.5% increase over the week. In China, President Xi Jinping's visit to the US and regulatory efforts to meet the "reasonable" funding needs of property firms provided a slightly positive sentiment. Despite this, Asia IG spreads tightened to their narrowest levels since 2018. In contrast to the US and EUR credit markets, Asia IG bonds outperformed their HY counterparts, boasting a 2.8% gain in 2023 compared to HY's 0.3%. Notably, China real estate bonds seem to be experiencing another rebound, with the iBoxx USD Asia China Real Estate index up more than 6% in November, despite a decline in new-home prices. In Uruguay, the Central Bank executed a widely expected 25bps interest rate cut to 9.25%, signaling a cautious approach to monetary easing and indicating the end of the current cycle is approaching. Finally, this weekend, Argentinians will cast their votes in a closely contested presidential election, featuring economist Javier Milei and Ministry of Economy Sergio Massa as the main contenders.