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In this outlook, we outline the global backdrop that emerging markets (EMs) can expect in 2024, including a more dovish US Federal Reserve (Fed), a more supportive backdrop for EM currencies and weak global growth. At its December meeting, the Federal Open Market Committee (FOMC)’s statement signalled the end of the hiking cycle and opened the door to a discussion on rate cuts. If supported by incoming inflation data, a more dovish Fed will clearly be positive for EM debt, although it is important to note that US rates are still likely to remain significantly higher than the near-zero levels of 2021. Furthermore, if inflation were to re-accelerate or prove to be stickier than expected, we are likely to revert back to the higher-for-longer US rate environment.

While the US has so far managed to avoid a traditional recession, different sectors have been experiencing downturns at different times. The US looks set to slow further from its current pace given both the lag from a tightening in financial conditions and a lower fiscal impulse in 2024. We already see evidence of slowing labour market activity and a normalisation in some measures of consumer credit performance. 

The path for EM has historically been highly correlated with US growth, as shown in the following chart, and taken very different paths depending on whether the US manages to have a soft landing or not. The fact that the US experienced the less-severe “rolling recession” in 2023, suggests that it may avoid  

EMBI spreads during US rate cycles and recessions

Past results are not a guarantee of future results.

As at 30 November 2023. Sources: JPMorgan, Bloomberg
Left vertical axis: Emerging Market Bond Index (EMBI) spreads (bps). Right vertical axis: Fed Funds rate (%). Shaded periods are National Bureau of Economic Research (NBER) US recessions. 

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