What happened last week?
The Fed Governor Powell aimed to leave the possibility of a future rate hike open, emphasizing the need to proceed cautiously. Market conviction remains low, with only a 20% probability of a rate hike by the end of January, up from 10% during the week. In Europe, ECB President Christine Lagarde expressed confidence in maintaining the deposit rate at 4% to control inflation but acknowledged the need for reconsideration in case of major shocks, especially with potential impacts from energy prices. Discussions on reinvestments in the pandemic emergency bond purchase program (PEPP) will be held in the near future. In the UK, BoE Governor Andrew Bailey stressed the importance of fighting inflation and deemed it premature to discuss rate cuts despite market expectations. However, BoE Chief Economist Huw Pill expressed a clearer stance, indicating no necessity for further interest rate hikes to curb inflation due to an already restrictive policy. In Australia, the RBA resumed rate hikes as anticipated, increasing rates by 25 bps to 4.35 bps, while the Polish Central Bank kept interest rates unchanged against market expectations. Finally, in Japan, Governor Kazuo Ueda signaled a cautious approach to monetary policy normalization, citing challenges in addressing below-target inflation and emphasizing a more dovish stance.
EM debts exhibited a solid performance this week, particularly in the Middle East, where the region reclaimed half of its losses since the onset of the Israelo/Palestinian conflict. This robust showing buoyed the index, as the credit spread of the Bloomberg EM Corporate Bonds Index tightened by more than 10bps, completely offsetting the impact of rising interest rates and resulting in a gain of +0.2%. While the EM sovereign bond index faced a minor dip (-0.5%)due to interest rates, EM local currency bonds showcased resilience, recording a solid gain of 0.4%. In China, defensive real estate issuers such as Vanke and Longfor rebounded following a PBOC meeting involving government officials, regulators, and developers. Although this boosted sentiment for developers with state support and strong financials, it's unlikely to fully resolve China's persistent property debt crisis. Concurrently, Country Garden experienced a brief rebound amid reports that Chinese authorities might urge Ping An Insurance Group to acquire a controlling stake. However, Ping An promptly denied receiving such a request. Turkey made a successful return to the international bond market, issuing a 5-year $2.5 billion Sukuk, thereby achieving its 2023 external issuance target of $10 bn (unchanged in 2024). The robust demand, coupled with this year's lowest yield, signifies a tightening in Turkey's CDS spread following post-election policy changes. In Latin America, the Central Bank of Peru executed a widely anticipated 25 bps interest rate reduction to 7%, prompted by the deterioration in economic activity and easing inflationary pressures.