Although it is true that several Central Banks of Emerging Countries have already begun their cycles of lowering rates – Latin America being one of the advanced regions – in the last month some Central Banks of Developed Countries have joined.
He Swiss National Bank, the European Central Bank and the Bank of Canada have made the first reduction in their reference rates. Even this week they meet Reserve Bank of Australia (18-06) and the Bank of England (20-06) so there could be news, although the market assigns, in both cases, a greater probability to the scenario that there will be no movements in rates. He Bank of Japan It also joined the rate normalization cycle, but, paradoxically, in its case this implies raising the rate instead of lowering it. And, as always, the focus is on the Federal Reserve (FED) of the United States where there was a meeting and several news last Wednesday, June 12.
Firstly, the monetary policy decision; The FED decided to keep the rate unchanged within the range of 5.25%-5.50% (YTM). Second, FOMC members updated their quarterly economic projections, keeping the annual growth rate and unemployment rate unchanged for 2024 at 2.1% and 4.0% respectively.
However, the novelty came from the side of inflation, adjusting upwards its expectations for the current year for both the general and core versions, which forced it to rethink the number of rate cuts. While in March the FOMC median projected 3 rate cuts by 2024, they now expect there to be only one.
At the same time, increased from 3 to 4 (from 75 to 100 bps rate decrease) the number of decreases by 2025. The base case remains that the FED’s next move, whenever it occurs, would be a rate cut. And this is where economic data and market expectations come into play.
The FED is in mode data dependent. This is relevant because on the same Wednesday that the FED updated its projections, the CPI inflation data for the month of May in the United States was known. Both the general and core versions were below the median of economists’ projections. The market took note of this and, despite the more contractionary bias of the FED (projecting higher inflation and fewer rate cuts for 2024), it once again got ahead of the cycle, discounting that in 2024 we will have 2 rate cuts, the month of September being the most likely for the first casualty to arrive.
Given current rate levels, The expectation regarding the monetary policy cycle and what the market discounts in prices is that value is seen in Fixed Income, both short and long. duration. Even more value is seen for multi-asset portfolios with exposure to US market stocks because Fixed Income could function as a hedge. In a context of economic slowdown or contraction, stocks could be negatively affected, while this could mean a more aggressive rate reduction cycle and, therefore, Fixed Income offset part of the loss that stocks could generate. Value is seen in Fixed rent by the fundamentals of the asset, but also by the relative value compared to other asset classes.
What can happen in Argentina with rates?
For now it affects us tangentially. He Risk country Above 1,300 basis points means that Argentine assets have a high idiosyncratic risk component in their valuations. This means that there is still a lot of work to do behind closed doors before thinking about how the international context could favor us or not.
However, the strategy of the current administration is to regain access to international debt markets to partially or totally refinance maturities – for this it is necessary that the Risk country continue your downward path. But what Argentina’s ability to access the markets in a context of low interest rates contributes to thinking about a more sustainable debt path. A more favorable international context is never a bad thing.
What can affect us more directly today is how the US dollar reacts to the FED’s decisions. Since 2021, the dollar has been steadily appreciating against the broad spectrum of currencies. What we begin to wonder then is when – if it happens – this cycle of appreciation will be reversed because, potentially, it will be great news for Emerging Countries. Especially for those who export commodities like Argentina. Weaker economic activity and lower rates in the United States could help that scenario materialize.
In that case, perhaps the medium term could be doubly favorable -lower rates and a weaker dollar- for Emerging Countries in general and for Argentina in particular.
CFA and Fund Manager of Schroders Argentina.
Source: Ambito
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