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Fed cuts are helpful for EMs but US election event-risk is not

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

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@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 US Federal Reserve’s (Fed) definitive shift away from focusing solely on inflation risks and towards labour market considerations with an above-consensus 50bp rate cut last week provided a clear signal about the intent to remain ahead of the curve. While that motivation keeps the risk of further large adjustments alive in the near term, it also trims the risk that gradualism today could result in deeper cuts down the road. From here the responsibility sits with the data to further diminish downside risks. As we have catalogued over recent weeks, Fed easing should relax the constraints on EM policymakers and support a widening out of the EM rate easing cycle – with our eyes on India, South Korea, Taiwan and Turkey to join their early-cutting EM peers. We would however caution that whilst the Fed is a supportive outcome for the EM complex, the investment horizon still remains capped by the upcoming US election. The policy proposals of former President Trump – including a 10pp increase in the effective US tariff rate – would prompt retaliatory measures from US trading partners and a potential strengthening of the US dollar. In a global “trade war” environment, EMs have more to lose than most.

FX views

Larger Fed rate cut boosts optimism over softer landing for US and global economy providing support for EM FX. The CNB and NBH to follow SARB in cutting rates after Fed policy action. China growth concerns remain downside risks for EM FX alongside threat of higher US trade tariffs after US election. Speculation intensifies over further China policy stimulus.

Week in review

Week in review
GCC central banks followed the US Fed with rate cuts (given their US dollar pegs). South Africa cuts rates (-25bps) for the first time in four years, signalling an optimistic inflation outlook. Turkey kept rates on hold at 50.00% but adjusts its forward guidance with likely rate cuts before year-end. Finally, the latest sovereign debt data in Oman signals a strengthening in the profile with S&P set to upgrade the sovereign this week.

Week ahead

In the week ahead, there will be rates meetings in Hungary (MUFG and consensus: -25bps to 6.50%) and Czech Republic (MUFG and consensus: -25bps to 4.25%). Elsewhere, global markets debate will continue to focus on the pace of cuts and the ultimate landing zone.

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 for the remainder of 2024.

Core indicators

Core indicators
The latest weekly IIF flow data signalled that attracted around USD30.9bn in August 2024 – a similar reading to July. Despite increased volatility in the market steaming from political risk, monetary policy uncertainty and a slow drying up of carry trade, August witnessed sustained inflows to EM debt.