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Contents
Market Overview
Macro Review
U.S. payrolls missed to the downside and unemployment ticked up to 3.9%. The market can begin to agree with Chair Powell’s FOMC remarks. His Q&A sessions remain the most volatile aspect of the FOMC. Treasury yields declined 8-11bps and the curve steepened, but half of this move was during the press conference. Powell’s comments were deemed to be less hawkish than expected, which was validated as he stressed it would be “unlikely that the next policy rate move will be a hike”. Powell had also suggested that either softer inflation data or a weakening in labor markets would prompt the Fed to cut policy rates. He also continued to note that policy rates are sufficiently restrictive. We had evidence of this last week. A lesser focus was on the Treasury’s Quarterly Refunding Announcements relative to the previous occasions. Therefore, after U.S. Treasury yields moved almost 100bps higher since late December, yields quickly fell in the latter part of the week. A combination of China’s Golden Week Holidays and May Day across continental Europe and Latin America kept markets relatively quiet, even if the Bank of Japan unofficially intervened in FX. We also saw the Bloomberg Commodity Index have its worst daily session since November on Tuesday as copper, gold and silver all declined by over 2%, which triggered sizeable volatility in EMFX. The U.S. Employment Cost Index triggered a chunky sell-off, but this was moderated by (1) the Chicago PMI which was only one-tenth off from being the worst print since the pandemic (37.9) and (2) by Chair Powell’s comments the following day.
EM Credit Update
Emerging markets sovereign credit (cash bonds) ended the week up +0.4% with credit spreads 37bps wider. Sovereign outperformers were Sri Lanka, Tunisia and Iraq, while Ethiopia, Zambia and Bolivia underperformed. The index widening was technical in nature this week. The inclusion of Venezuela on April 30th contributed to 32bps of widening and will be phased in over three equal monthly installments. The total weighting of Venezuela by the end of June will be c.60-70bps. Prices since February have risen 15% as investors re-weight and re-balance portfolios and take a more favorable outlook on the sovereign.
The Week Ahead
Pivotal EM elections are intensifying over the next two months with Panama’s on Sunday before South Africa’s later in the month. Away from that, Euro-Area growth likely expanded a lackluster 0.1% in 1Q but should have done enough to exit a mild technical recession. Across the Asian Pacific region, Australia’s RBA decision is due but follows the recent 1Q inflation surprise to the upside. The Bank of England is also likely to keep interest rates on hold. There is a slew of data out of China covering credit and exports. Key EM interest rate decisions include Brazil (10.75%), Malaysia (3.0%), Peru (6.0%) and Poland (5.75%).
Highlights from emerging markets discussed below: Turkey inflation likely close to peak, Pakistan board approves $1.1bn disbursement completing SBA program, and Argentina passes latest omnibus bill and fiscal package in the Lower House; delay in tariff adjustments.
Fixed Income
Equities
Commodities
Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of May 3, 2024 (late-morning).
Emerging Markets Weekly Highlights
Turkey inflation likely close to peak
Event: Turkey’s inflation for April came in slightly cooler than expected at 3.2% MoM and 69.8% YoY vs. consensus market expectations of 3.4% and 70.1%, respectively.
Gramercy Commentary: Investors are watching Turkish inflation data closely for signs that MinFin Simsek’s ambitious macroeconomic normalization program is beginning to work and cooling down the Turkish economy. We believe that a peak in inflation is likely to materialize in the coming one to two months, highlighting for the broader market the attractiveness of Turkey’s local debt which already offers one of the highest carry returns in EM on a forward-looking basis. This holds true even when assuming less optimistic inflation forecasts than the CBT’s projected disinflation path which anticipates inflation finishing the year at 36% YoY. Improvement in the inflation outlook is also important for local economic agents’ willingness to hold TRY denominated assets, which has important implications for general TRY stability and the crystallization of more sizable FX inflows. With the recent local elections now in the rear-view mirror and no other elections on the horizon for the next few years, we believe the authorities are set to further tighten the overall policy stance. We expect fiscal policy to take the baton from monetary policy in driving onshore financial conditions tighter to cool down domestic demand and break down inflation inertia.
Pakistan board approves $1.1bn disbursement completing SBA program
Event: The IMF Board completed the second and final review of Pakistan’s nine month SBA, providing the authorities with a $1.1bn disbursement. The press release highlighted recent macroeconomic improvements under the arrangement, with anticipated growth of 2% and primary surplus of 0.4% of GDP for FY 2024 as well as FX reserves, which have recovered to $8bn from $4.5bn at the onset. Meanwhile, the Central Bank left rates on hold at 22% as CPI came in below expectations at 17.3% (vs. 17.6%).
Gramercy Commentary: The latest IMF disbursement further helps support Pakistan’s balance of payments and FX reserve recovery in the near-term. Successful completion of the program in a politically contentious backdrop is credit positive. Going forward, the market will anchor its focus on the ongoing negotiations with the Fund over a fresh longer-term program and on progress on regional bilateral investment programs. On the former, continued tight monetary policy despite declining inflation should help with commitment to macroeconomic stability and reform under a new IMF facility.
Argentina passes latest omnibus bill and fiscal package in the Lower House; delay in tariff adjustments
Event: The Lower House passed the omnibus bill and fiscal package in general terms and on a chapter-by-chapter basis. Both bills will now move to the Senate for discussion. Minister of Economy Luis Caputo announced a delay in tariff adjustments in aim to ease the burden on the middle class while BCRA lowered rates further to 50%. At the same time, members of the economic team are in China renegotiating the existing swap arrangement.
Gramercy Commentary: The political progress on the fiscal adjustment is constructive, albeit the vote in the Senate will be more challenging than in the Lower House given the ruling LLA party holds a marked minority. Voting is set to begin as early as next week. While Milei’s initial economic policies have been successful, the Administration needs to secure longevity and durability of the adjustment. Social conditions remain fluid while a recent survey showed a dip in government confidence.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of May 3, 2024.
For questions, please contact:
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
James Barry, Director, Deputy Portfolio Manager, [email protected]
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