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Global markets continue to trade a soft landing – EM positive

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

The latest set of data is still by-and-large coming out in line with a soft landing – growth is slowing enough to control inflation but still high enough to avoid recession. With this context in mind, we examine the 1995-96 Fed easing episode (the only time in the last five cutting cycles where the economy experienced a soft landing) to contextualise how EMs may perform. We caveat that the comparison is complicated by the fact that, during the mid-1990s, the EM asset class was not overly developed yet, as FX was largely pegged, and EM rates was not a significant asset class. As such, an investigation of how DM benchmarks performed offers a sense of how the EM complex may trade. Our results suggest that during the 1995-96 US soft landing period, equities consistently performed and credit spreads tightened, which bodes well for EM credit. Meanwhile, US rates rallied until the last Fed cut which is a positive sign for EM rates. Finally, the US dollar was stronger which in principle may suggest EM FX trades poorly in a soft landing scenario – though we caveat this that soft landings benefit cyclical currencies of small open economies that are commodity-intensive (which is a good proxy for EMs during 1995-96), which may support a net positive EM FX performance in a soft landing.

FX views

Stronger US inflation data has been disappointing, providing setback for EM FX. One of the key event risks for emerging market currencies in the week ahead will be the latest FOMC meeting on 20 March. A more delayed start to Fed’s rate cut cycle could trigger a more sustained USD rebound.

Week in review

A host of inflation prints in February – lower in Czech Republic and Israel, whilst higher in Egypt, Russia and Saudi Arabia. Saudi Q4 2023 GDP contracted sharply owing to lower volumetric oil production – critically a move to the market recommended chain-linking methodology is positive on data governance.

Week ahead

Rates decisions are due in Czech Rep (MUFG and consensus; -50bp to 5.75%) and Turkey (MUFG and consensus; on hold at 45.00%). Meanwhile, inflation in South Africa for February is due (MUFG: 5.7% y/y; consensus 5.5% y/y).

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden in 2024 (see here).

Core indicators

EM securities attracted USD22.2bn in the month of February – equity and debt flows were USD17.2bn and USD5.0bn, respectively.