A 2023 International Monetary Fund (IMF) working paper; spillovers to Emerging Markets from US economic News and Monetary Policy, had some interesting findings. That “economic news, and not just monetary policy, in the United States (US) affects financial conditions in emerging markets.”
The report specifically mentioned employment as having the strongest effects, followed by news about economic activity. Inflation news has the least effect on average. It further added that “effects are felt immediately, within two days of the news release.”
Altogether, the research suggests that news about the US economy and monetary policy is an important fundamental risk factor in the pricing of emerging market assets, and news may have predictable relationships with risk premia on such assets.
With this understanding, I also took some time and read through the transcript of the US Fed Chair Jerome Powell’s presser held on March 20th. I highlight three key points. One, inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.
Two, labour market tightness has eased and the risks to achieving their employment goals are coming into better balance. Three, economic activity has been expanding at a solid pace as evidenced by recent indicators - for 2023 as a whole, gross domestic product (GDP) expanded 3.1 percent, bolstered by strong consumer demand as well as improving supply terms.
All said, judging from the above, should the US economy continue to perform and specifically inflation convincingly trend towards its two percent target, this will be very good news for emerging markets (including many frontier markets in Africa) and their Euro-bond ambitions.
After more than 12 months of inactivity, the Eurobond market in Africa has roared back to action this year led by Ivory Coast, Benin and Kenya. All bonds were oversubscribed raising a total of $4.8 billion with Ivory Coast’s getting the most decent rate at 8.5 percent.
Benin and Kenya settled at 8.375 percent and 10.375 percent. If positive news about US employment (more jobs or fewer jobless claims) continue in the next three months, we can safely expect lower credit dollar spreads on dollar-denominated emerging market government bonds. I choose to believe there are a number of African countries hoping for positive data (of course accompanied by rate cuts) to tap these markets.
Possibly, a number with upcoming maturities may be tempted to raise new issues through refinancing and to lengthen the average maturity of their debt. Lower yields will be a great story to tell.
But of course, anything can happen within three months. Guess the reason why the US Fed chair chooses to remain cautious and balanced. I’ll close with an excerpt of his comments made during the March 20th presser, “We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year. The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”
Mwanyasi is MD, Canaan Capital.
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