How will emerging markets fare? Ed Yarden answers

“I think Fed officials are coming to the view that there’s really no rush to cut interest rates. They don’t want to make the mistake that the ECB just made, where the European Central Bank cut their deposit rate by a quarter point in time, announced that this could be one and will be for a while,” says Ed Yardeni, President & Chief Investment Strategist, Yardeni Research.

Just judging by what the Federal Reserve did overnight, shifting its dot plot to now predict just one rate cut this year from the previous one to FY25. What do you think should be read into this?
Well, he started the year with many investors in the market indicating that we could have six or seven cuts in the federal funds rate. I never realized that. I think it was just kind of the fallout of a lot of people being wrong about a recession over the last couple of years that they thought that the economy wasn’t going to be able to handle this kind of level of interest rates and that the Federal Reserve was going to have to lower interest rates to avoid a recession. But I think interest rates have actually normalized. They are normal. They are back where they should be. The 10-year bond yield in the United States should be between 4% and 5%, so where it was before the Great Financial Crisis and so I think we’re just seeing normalization in the financial markets and the stock market has shown that it certainly has. can tolerate these interest rate levels as long as the economy can do so and so far, so good.

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And I think Fed officials are coming around to the view that there’s really no rush to cut interest rates. They don’t want to make the mistake the ECB just made, where the European Central Bank cut their deposit rate by a quarter of a point at a time, announced that it could be one and done for a while. I was just thinking about it. While the Fed is crucial, the Fed is important. We look to the Fed for guidance on what’s going on with the world and what’s going on with the US economy in particular. But is the Fed really losing its relevance from a financial market perspective, because frankly, the financial markets have moved independently of what the Fed’s communication has been for at least the last 18 months?
Well, to be honest, I hope so. I hope it is becoming less important because it has been very important for a long time. It appears that the markets have essentially been a puppet that has been controlled by the Fed pulling the strings. And the reality is that a lot of the inflation that we had was related to the pandemic and inflation in recent months in the past, actually since the summer of 2020 has moderated itself.

We didn’t have to have a recession in the US to bring down inflation. China has been in a property recession and they are exporting deflation to the rest of the world, including the United States. And meanwhile, rent inflation is falling in the United States. So, between lower commodity inflation and lower utility inflation, I’m not entirely sure why the Fed feels the need to be in the spotlight here. They can put a low key here and admit that as far as their dual mandate is concerned, the economy is doing well and inflation is easing, so maybe interest rates are where they should be.

Where do you see emerging markets going now? The historical pattern is when interest rates peak, money flows back into emerging markets. Now, interest rates have peaked. Does this mean parties in emerging markets will start again?
Well, I think the days when we could look at emerging markets as an asset class and just overweight emerging markets ETFs, I think those days are over. I think we need to be much more discriminating, and investors have clearly been much more discriminating. They didn’t buy China. They have bought India. They didn’t buy Mexico. They haven’t bought commodity producers like Brazil.

I think a lot will depend on commodity prices for emerging market commodity producers. And commodity prices look like they’re going to stay pretty quiet here for a while because the global economy isn’t booming.

She hasn’t taken a sip. It’s just kind of confusing. And if commodity prices just keep moving sideways here, I think that prevents some of these commodity-related emerging markets from doing much. Meanwhile, I think, as you mentioned in your conversation earlier, it’s very much a question for global investors to what extent they want to continue to get into India, where valuations get somewhat higher than, obviously, China, which as you said it seems to you. free.

But India is a democracy, as we just saw in the elections. Democracies sometimes lead to unexpected results. It looks like Modi is still very much in power and influence and is committed to boosting the Indian economy. So as long as India continues to spend money on infrastructure and provides a relatively stable political environment and predictable environment where the rule of law still matters, unlike China where the government can change the rules for you overnight, I think India will continue to be better. China.

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