Emerging Market Debt Indicator September 2023

September proved to be a challenging month for financial markets, with EM fixed income no exception. The risk-off tone was fuelled largely by market participants pricing in a ‘higher for longer’ interest rate outlook in the US. The drivers behind this revision in expectations included somewhat more persistent inflation and surprisingly resilient economic data. Furthermore, although the US Federal Reserve kept interest rates on hold at its September meeting, it increased its ‘dot plot’ forecasts for interest rates next year by 50 basis points (bps). This drove a sharp rise in US Treasury yields, with the 10-year closing the month at 4.57% (46bps higher than the end of August), causing a sell-off in bond markets.

The bond market sell-off extended beyond the US, as sovereign rates in Europe also rose, notably in Germany, France and Italy. The European Central Bank (ECB) raised its key interest rate to a record high of 4%, although it signalled that the hike was likely to be its last. The ECB also indicated that it expects inflation to reach its 2% target over the next two years – which is slower than expected – with economic growth likely to slow further.

A further headwind to financial markets came in the form of the continued rise in the oil price, which also fed fresh inflation concerns across emerging and developed markets.

Turning to EMs, inflation across Asia generally printed higher than expected, although this was mainly driven by volatile items such as food and fuel rather than a reflection of core inflation dynamics. Economic data releases in China were more encouraging overall and the People’s Bank of China cut the reserve requirement ratio by 25bps. In Latin America, the central bank in Brazil cut its policy rate by 50bps, in line with the market’s expectations, and Chile’s central bank also continued with its rate cutting cycle, this time cutting by 75bps. In contrast, Mexico’s central bank continued to be on the hawkish side, with the governor saying that rate cuts are not yet on the table.