What happened last week?
This week's central bank narratives weave a tale of caution and anticipation across the globe. Fed officials, echoing through the voices of Thomas Barkin and Adriana Kugler, have put a spotlight on the labor market's strength and ongoing disinflation efforts, suggesting rate cuts might be on the horizon later this year, yet urging patience for now. The market's response was to temper expectations, dialing down the likelihood of a May rate cut to 70% and looking towards June with near certainty. Across the Atlantic, the ECB, with officials like Francois Villeroy de Galhau and Philip Lane expressing a guarded optimism, hinted at possible rate reductions in 2024, contingent on inflation's steady descent to the 2% target. Despite market bets on an early cut, the consensus among Eurozone policymakers leans towards waiting for clearer signs of inflation's trajectory, with June emerging as a probable starting point for easing. In the UK, the Bank of England's Jonathan Haskel, previously advocating for rate hikes, now acknowledges the potential for cuts as inflation shows signs of cooling. However, he stresses the importance of confirming these inflation trends, particularly in wages and the services sector, before adjusting policy. Meanwhile, in Japan, the Bank of Japan's Deputy Governor Shinichi Uchida underscored a cautious exit from negative interest rates, implying a gradual approach to future rate hikes. Amidst speculation of an imminent rate increase, Uchida's comments suggest a commitment to maintaining accommodative financial conditions, ensuring a smooth transition that avoids market disruptions. This week confirms a global central banking narrative of cautious optimism, with a shared emphasis on data-driven decision-making.
EM have experienced a mixed start to 2024, with debt instruments primarily impacted by rising U.S. interest rates, yet corporate credit spreads in EM tightening significantly. Notably, EM corporate credit spreads have reached 250bps, a level not seen since 2018, showcasing strong spread performance. This has enabled EM corporate debt to achieve a +0.6% performance, markedly outperforming U.S. Treasuries, which have declined by -1.5% YTD. This week highlighted China's ongoing deflationary pressures, with January witnessing the fastest pace of consumer price declines since 2009. Despite this, Asian IG bonds in USD have tightened by 11bps to 99bps, while the HY index saw a significant tightening of 45bps to 581bps, boosting its YTD total return to over 3.5%, in contrast to -0.6% for Asian IG bonds. A notable development was Vedanta's bonds receiving a lift after the company prepaid $779 million to redeem a portion of its debt and extend bond maturities, averting a potential default. In Latin America, Mexico received a stable outlook affirmation from S&P at BBB+. The central bank maintained its benchmark rate at 11.25% for the seventh consecutive meeting, with forward guidance indicating potential rate cuts starting March, contingent on favorable inflation data. Conversely, Argentinian bonds faced challenges as the Milei Omnibus laws were rejected in the house of deputies. Turkey's monetary policy landscape has undergone a significant shift with the abrupt resignation of Hafize Gaye Erkan, the Central Bank's first female leader, and the appointment of Fatih Karahan. Karahan's background, including time at the New York Federal Reserve, suggests a continuation of orthodox monetary policies amid ongoing inflation challenges. Turkey's successful issuance of a $3 billion 10-year eurobond at a yield of 7.875% reflects strong market confidence and a strategic pivot towards tighter monetary policies.Lastly, India's central bank maintains its hawkish outlook, holding the benchmark repurchase rate at 6.5% and persisting with its policy of "withdrawal of accommodation" in light of inflation exceeding targets.