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Contents
Market Overview
Macro Review
The Fed’s FOMC turned out to be a benign affair. The Fed hiked 25 bps to 5.25-5.50% but there was an increasing sense that it was the final hike. The statement was a copy-and-paste of the June FOMC except that recession risks in 2023 were dialed back. Chair Powell stated that the Fed will remain data-dependent, and that monetary tightening is continuing to take effect. There are two payroll and CPI reports before the next FOMC, which will in part determine the September decision. Chair Powell cited that he did not expect the Fed to cut rates this year, although some officials expect cuts in 2024. Fed Fund Futures imply that policy rates will be cut by 125 bps next year, but the Fed recognizing this in itself is an important step. Elsewhere, crude oil traded back to April highs, the VIX reacted to the Bank of Japan meeting, U.S. 10-year inflation break-evens retreated from the high levels last seen in the aftermath of the SVB crisis in March, U.S. PMIs showed an upbeat picture (unlike in Europe), and U.S. HY traded down to spread levels as tight as 15-months ago. The Dow Jones rose for a thirteenth consecutive session, which is the longest run of consecutive gains since 1987, meaning risk-adjusted returns in fixed income are far more compelling. The challenge for USD is an increasingly hawkish ECB and BoJ after tweaks were made to the YCC policy. Within EM, Brazil was upgraded by Fitch to BB. Fitch forecast Brazilian GDP at 2.3%, which is marginally ahead of the latest IMF views. The IMF markedly upgraded its Brazilian GDP forecast from April to 2.1% from 0.9%. In fact, the IMF increased its EM global growth forecast for 2023 back to 4.0% (as it was in January) from 3.9% in April, but downgraded 2024 to 4.1% from 4.2%. Importantly, they see inflation falling from 8.7% in 2022 to 6.8% this year and 5.2% in 2024. Speaking of inflation, Turkey’s inflation report highlighted that the CBRT now forecasts year-end inflation to reach 58%, which suggests that the disinflationary trajectory will quickly end after reaching 38% in June. On this topic, Turkey’s Central Bank changed the composition of the MPC and appointed three officials who hold orthodox views on monetary policy.
EM Credit Update
Emerging market sovereign credit (cash bonds) ended the week up 0.1% with credit spreads 15 bps tighter. Sovereign outperformers were Ukraine, Gabon and Angola, while Ecuador, Croatia and India underperformed. Gabon launched a tender for its 2025 and 2031 Eurobonds in $450 million as it seeks to issue a blue bond. The blue bond is for conservation purposes aimed at improving Gabon’s biodiversity in the maritime sector. The bond will be guaranteed by the IFC via insurance against expropriation. This has become the latest trend among EM sovereign issues after Ecuador issued its Galapagos bond in May. As such, these new instruments create positive headlines, but price where Double A U.S. issuers trade.
The Week Ahead
With a data-dependent Fed, the upcoming non-farm payrolls number is a key release. Secondary events include Eurozone CPI, Bank of England and Australian interest rate decisions, along with Chinese PMIs. Chinese PMIs are expected to validate the theme of contracting manufacturing and meek service data. EM interest rate decisions are then due out of Brazil (13.75%), Colombia (13.25%), Czech Republic (7.0%), Pakistan (22%) and Thailand (2.0%). Thailand is expected to hike policy rates by a final 25 bps as it ends its tightening cycle. Meanwhile, the broader EM cutting cycle is expected to focus on Brazil and Peru after Chile’s decision at the end of the week. Costa Rica has already cut rates and loosened policy on four consecutive occasions with a further 50 bps cut this week. Inflation will be closely followed out of Poland and Turkey, and to a lesser degree out of Indonesia, Philippines, South Korea and Sri Lanka.
Highlights from emerging markets discussed below: China’s Politburo meeting signals more stimulus to come, The Central Bank of Turkey (CBT) adjusts inflation projections sharply higher but change in interest rate policy is not on the horizon and Argentina secures staff level agreement with the IMF on upcoming $7.5 billion disbursement.
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 July 28, 2023 (mid-afternoon).
Emerging Markets Weekly Highlights
China’s Politburo meeting signals more stimulus to come
Event: The mid-year Politburo meeting concluded on July 24th where statements reflected increased emphasis on the need for economic support measures, specifically property. The omission of “housing is for living, not speculation” is noteworthy as is a focus on capital market activation, reviving investor confidence, and a holistic approach to resolving local government debt risks. Later in the week, reports indicated that policies to further reduce requirements for down payments and mortgage rates for first-time home buyers could be imminently forthcoming. At the same time, Pan Gongsheng, who was recently appointed as the CCP’s new party secretary at the PBOC, was announced as the new Governor while Wang Yi returned as Foreign Minister, following Qin Gang’s removal.
Gramercy commentary: We see the Politburo statements as being in line with our expectation for moderate additional near-term stimulus to shore-up the property and consumer sectors and aid the government in achieving their 5% growth target. Forthcoming announcements on the details of the near-term measures will provide more clarity on the ultimate impact. We think the commentary also sets the stage and improves prospects for more holistic and financial sector planning to support local governments and property during key policy meetings later this year. We do not anticipate any major policy shifts from Pan Gongsheng as PBOC Governor, albeit his dual role as Party Secretary does provide him with an incrementally stronger mandate. Similarly, the return of Wang Yi as Foreign Minister should not materially alter China’s foreign relations or policy in our view. He has attended recent meetings with U.S. officials and held the position from 2013-2022.
The Central Bank of Turkey (CBT) adjusts inflation projections sharply higher but change in interest rate policy is not on the horizon
Event: The new Governor of Turkey’s Central Bank, Ms. Gaye Erkan, made her debut in front of a broader market audience this week. Governor Erkan used the opportunity to present CBT’s updated inflation forecasts that now project annual inflation of 58% at year-end, from 22% previously.
Gramercy commentary: The sharp adjustment in CBT’s inflation forecast brings it in line with market expectations and marks a departure from highly unrealistic projections under the previous governor’s leadership. However, although a welcome development from a market perspective, this change does not signify that monetary policy will be adjusted accordingly via conventional channels. As indicated by the CBT’s initial policy decisions under Governor Erkan, interest rate policy in the Turkish economy remains politically constrained. In that context, guided by Minister of Finance Mehmet Simsek, the economic team’s strategy in the next few months will likely focus on other ways to cool down domestic demand and tackle inflation, mostly via regulatory measures designed to withdraw Lira liquidity from the system. This strategy is unlikely to incentivize external portfolio inflows into the economy, but we expect financial support by President Erdogan’s friends in the Gulf Cooperation Council to anchor an economic “muddle-through” until important local elections in March 2024. In this context, the currency is the asset that may start to look interesting in the run-up to the elections, provided macroeconomic conditions point to stability at weaker than current levels.
Argentina secures staff level agreement with the IMF on upcoming $7.5 billion disbursement
Event: The authorities inked a deal with the IMF staff on combined 5th and 6th reviews under its existing EFF program translating to a $7.5 billion disbursement upon board approval in 2H August. The next review is scheduled for November. The press release emphasizes the challenging economic situation the country faces in relation to missed end-June program targets. As such, a policy package has been agreed with measures to rebuild reserves and enhance fiscal sustainability. While some criteria and assumptions have been revised, the primary balance deficit target for 2023 of 1.9% of GDP remains intact.
Gramercy commentary: We see the announcement as constructive and in line with expectations for partial frontloading of disbursements which provides the government with some minor breathing room to manage an otherwise still very challenging macroeconomic backdrop through the electoral period. Scheduled repayments to the IMF through Oct are roughly $7 billion and covered by the upcoming disbursement, reducing risk of arrears during this timeframe. Looking ahead, the prospects for the upcoming primary vote known as the PASO on Aug 13th have improved moderately with ebbing of support for outsider candidate Javier Milei in the polls and strengthening of the opposition albeit keeping in mind limitations of polling data.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of July 28, 2023.
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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