Executive summary
This week, we look at three critical issues:
- US Fed: Wake me up when September ends. On 30 July, the Fed is likely to remain on hold once again. But recent data provide encouraging signs that inflation is finally cooling down: for instance, the three-month average annualized headline CPI came out at only +1.1% in July – its lowest level since before the inflation burst of 2021-2022. This should convince the Fed to deliver its first rate cut as soon as September (-25bps to 5.25%), especially since strong Q2 GDP and solid momentum continuing in the current quarter do not seem to be jeopardizing price stability. Moreover, liquidity should start to contract soon, easing concerns that inflation may be reignited. Nevertheless, we do expect the Fed to reaffirm a hawkish bias in coming weeks as tailwinds such as fiscal policy will start to fade. After September, we expect it will pause during the November meeting before easing again in December (-0.25bps to 5%).
- Medium-term outlook broadly positive for EM currencies. EM currencies have depreciated significantly on the back of the Fed’s delayed rate cuts and restricted investor appetite, exacerbated by regional and local factors such as the political calendar and fiscal concerns. Nevertheless, the medium-term outlook remains broadly positive, driven by solid economic growth and slowing inflation. Balance-of-payment (BoP) risks have moderated overall since the beginning of the year despite cyclical volatility in some markets. However, asynchronized monetary easing and external political factors remain significant risks for EM BoP stability, with Argentina, Egypt, Ghana, Nigeria, Tunisia and Türkiye still at risk of a crisis. The improved medium-term outlook and recent market moves present attractive entry points for EM financial assets, especially EM local currency bonds, keeping in mind the importance of local factors. We expect hard-currency sovereign spreads to reach 220bps by year-end, and local-currency yields reaching 6.3% and 6% by the end of 2024 and 2025, respectively.
- Vietnam: Eyes on the "market economy" prize. On 26 July, the US is likely to officially recognize Vietnam as a “market economy”, a long sought-after feather in the cap of Southeast Asia’s growing export powerhouse. This would allow Vietnamese exporters to use their own numbers during anti-dumping procedures, though the immediate direct impact is likely to be limited (lower tariff rates for goods equivalent to 0.7% of GDP). Vietnam is now the 23rd largest exporter in the world, and extending the trends observed since 2017 could bring it to the 10th position in 2034. The trade relationship with the US has been booming: The US now represents roughly 30% of Vietnam’s exports, up from less than 20% a decade ago, and Vietnam now represents nearly 4% of US imports, up from around 1% a decade ago. However, its rising dependence on imports from China and the risk of tougher trade policy following the US elections could still hold back Vietnam's long-term progress.