EM Fixed Income: Inflation pressures and idiosyncratic EMEA EM politics

Hello, and welcome to our At Any Rate Emerging Markets Focus podcast, a place for us to discuss recent developments and key issues of focus in the EM Fixed Income Asset Class. I'm Ben Ramsey, Head of EM Sovereign Credit Strategy here at J.P. Morgan, and I'm joined today by Agnieszka Krzysztofowa, Head of EMEA EM and LATAM Local Market Strategy, and Mike Harrison, Senior EMEA EM Local Market Strategist, both at J.P.

Morgan. Agnieszka, Mike, thanks for joining. Nice to be here.

Pleasure to be on. Thank you, Ben. So, you know, we've obviously had an eventful couple of weeks, an eventful year here for markets.

I think we've seen a little bit of a pivot in the attention that's sort of been the main market driver over the last week. So certainly when we were doing this podcast a week ago, Agnieszka, we were quite focused on some renewed dynamism in the variables that were driving the U.S.-Iran conflict. There was a number of headlines at the start of, you know, two weekends ago in terms of, you know, basically the Trump admin, Trump looking to escort shifts through the straits, looking to open up the straits with some degree of force, some renewed risk of actual conflict, a little bit of evidence of that taking place.

And then we got back into a mode where apparently having negotiations again and waiting to see if we can get some breakthrough. And I think in that sort of renewed stalemate, the market has shifted away back to something we used to pay much more attention to, which is global macro and especially U.S. macroeconomic data. So at the end of last week, we had a solid April payroll number that kind of helped diminish some downside risk for the labor market, which, you know, had been less of a theme since we came into this year.

But it's still something obviously we pay attention to. At the same time, the latest U.S. CPI data came in stronger than expected.

Of course, meaningful contribution from gasoline, energy. I think the key point here we can say then is, you know, these things are interacting. Geopolitics hasn't really faded as a driver.

It's showing up in the inflation data and by extension in expectations for the Fed, the path of rates. That's clearly something that you all as local market strategists and rate strategists pay attention to. Today, let's discuss a little bit how we're framing risk-reward across the unfixed income and against this backdrop.

What to watch for if tensions re-escalate versus if negotiations help to stabilize energy prices. And let's dig into a little bit more of some specific E.M. idiosyncratic stories, namely some political tension that we've been paying attention to in a couple of your markets, some of your main markets, Mike and Aneska, being South Africa and Romania, of course, two very active high-yield local markets in the E.M. space. So let's start with you, Ben.

Is the market likely to start to lose its focus on the Iran conflict as it continues to wind on? And will this pivot to U.S. and global economic and inflation data come back as the main driver for price action and risk tolerance? Or is this a fleeting dynamic and we are again all back to watching Iran conflict?

Yeah, I think in short, the answer is no, not really. And yes, probably. I mean, it's going to be hard for the market to totally lose its focus on the Iran conflict, given just how important the level of where energy prices settle is going to be for the global narrative.

And that, as I sort of alluded to in the intro, plays right into, I think, the key variable that we've started to focus on even more. And that's, you know, what is the direction of travel here for inflation and how are central banks going to have to react to that? And of course, the central bank that we all look at most closely is the U.S.

Fed. We've got a change in leadership there. We've had an inflation trend, which is taking inflation, especially the headline, but also the core up to levels we haven't seen in some time.

So I think the treasuries are effectively now pricing in the idea that any easing that has been on the table is going to be much higher bar. I don't think we're yet in a world where we think the Fed is going to be hiking, but that could be a paradigm shift that would be certainly relevant, I think, overall for markets. But again, the key input here is going to be where oil prices settle.

And to that point, it's not going to be really possible for markets to take their eye off the ball of what's going on in the Straits. You know, our own commodities analysts have put out some new scenario analysis, some new price forecasts. I think we're looking for higher energy prices, at least looking for crude, WTI and Brent to stay at levels with Brent above 100 in the next couple of quarters.

So that will be a challenge. But I think markets are, and if we look at risk markets, if we look at S&P, U.S. equities, we look at credit spreads, markets certainly don't want to be on the wrong side of any sort of risk on sentiment, which comes from what looks like any definitive resolution of the conflicts with Iran. So, Ineska, maybe we can dig into the data a little bit more.

How are you reading the U.S. inflation data? How much of the observed pressure do you think was unexpected? And what do you make of the upward pressure, which is now, as I mentioned, filtering into U.S. treasuries?

Are you seeing similar dynamics in the local markets that you cover? And here's the money question. How will central banks, starting with the Fed, start shifting their reaction functions?

So, yes, it's been very interesting inflation data for markets. One upside surprise after another in terms of the week as it progressed. So, we started with CPI, small upside surprise.

Let's call it 0.1 percentage points sort of magnitude. Then a larger surprise came on the PPI. Consensus was 4.8 year-on-year.

And we ended up with 6, which I think is quite a dramatic number. And today we are getting import prices that are, again, higher than expected. So, certainly, it's a surprise compared to the forecast.

I would say that this is not a U.S.-only theme, although obviously the focus here has been on some of the magnitude of these surprises. We certainly, as we kind of got through April inflation data, the upside bias of these prices globally is becoming more obvious. We had a little bit of a lull in March when the surprises started to come in, not very dramatic.

And I think we just had to give some time to all these effects to feed through to prices. There are obviously contract issues. There are fall through products.

But certainly, I would say that while in March we were a little bit puzzled or we were speculating the fiscal actions by some nations were a bit more important in terms of keeping inflation down. I think now in April, the underlying thesis that this is a decent risk was happening to inflation is coming through to the data and U.S. is one part of it. Now, what is interesting and what makes the U.S. data so important is that while elsewhere we've shifted to price hikes, especially in some of the countries that we cover, Fed has been behind.

So, obviously, now the question is, is this the trigger where the narrative shifts and suddenly we have to contemplate hikes in the United States as well. The market has shifted pricing more directly. So, we certainly have done now that switch from pricing nothing to pricing, let's say, 20 base points of hikes over the next year.

It's not dramatic, but certainly that's the direction of change that has happened recently. Now, what does it mean for us? So, the first thing I would say is that the magnitude of the repricing really matters.

So far, it's been a very moderate repricing against a backdrop that in EM, some of the curves have moved ahead of this. And what I continue to watch is whether the market pricing signals anything about the reaction function, the underlying reaction function. So, let's look at what has happened, how much that moved pre-yield.

So, let's call the surprise about on CPI 0.1 percentage points. Pricing moved roughly by 0.2 percentage points. And in real yields, that means roughly it even up by 0.1.

We've seen that in 10-year real yields roughly as well. It's a little bit of a move. It doesn't get out of ranges yet.

So, I would say for now, the hypothesis that the reaction function doesn't change, it's still reactive to only the data rather than the underlying hawkish or dovish bias of the price shifting is broadly right. That's very important for us. That's what I think we are trading on in EM, that there is still this underlying pro-growth bias.

I would increasingly say that EM markets are vulnerable if that were to change. I was in a lot of client meetings this week, earlier this week, and it did come as a major topic, how would our markets react if the reaction function, the underlying real yield outlook changed. And there was certainly discomfort in the first week that we tried to learn how the new Fed chair would speak, whether there could be risk to this.

But broadly speaking, our view is that we are still in that same world of an asymmetric reaction function. Let's turn to credit markets. How have they reacted to this upward move in Treasuries?

Are we seeing any more risk aversion? Yeah, no, I mean, we've seen, we're basically with spreads at the tides of the year, at the tides of multi-year tides again. So, we've been basically sideways in terms of spreads.

So, with Treasuries moving higher, that does mean we've seen some small negative returns basically with the Treasuries pushing higher. Spreads haven't fully compensated that. But we're sort of, I would say, tready water this week.

Not a little, I mean, I think we've seen a little bit more selectivity. We've seen some names which have performed very well give up a little bit of ground this week, especially in the higher yield space. Certainly, some of the more idiosyncratic stories have, I think, been less moved on the credit side, although we're going to talk about Romania.

Romania is one which certainly performs over the last several weeks. I don't think that's a local story, though, more than a Treasury story. Broadly speaking, I think if we're in a world, as you said, where growth seems like it's really strong and resilient, and that's the reason why Treasuries are pushing higher, credit can sort of stomach a bit more inflation.

Credit markets tend to like higher nominal GDP growth at the end of the day. And I think this is a backdrop where we're likely to see credit spreads continue to grind tighter here. So, not a lot to see at this point.

I mean, it's hard to see how much tighter we can go. Again, we're super tight. But at the end of the day, strong growth, I think, is pretty good for credit.

So, Mike, let's get into some of these idiosyncratic stories. Let's bring you onto the scene here now. Can we discuss, and I think these stories are rooted in politics, what's happened last week in Romania, where the Prime Minister lost a no-confidence vote, largely stemming from resistance to austerity measures.

While in South Africa, I think the story is even a bit more complex, but the President has faced strong pressure based on a Constitutional Court review of some past corruption allegations and impeachment proceedings. Could you unpack both of these for us a little bit, sort of update us on the status of each case, explain how these different episodes are interacting with the respective local markets? What's transpired and what do you think is at stake?

Sure. Thanks, Ben. Not easy questions, but we'll give the lowdown.

So, let's start with Romania. The current Prime Minister, Bologian, is head of the Liberal Party, which is called PNL. And Bologian has been one of the key architects of this large piece of consolidation that we've seen through the summer of last year.

Now, he faced a no-confidence vote last week. This vote was tabled by the Socialist Party, called PSD. They're the largest party in the governing coalition.

They've been looking to gain more influence in the coalition, and their popularity has also been declining. So, as you can imagine, if you're implementing large fiscal consolidation, it's a bit harder to get those votes back. So, we had this vote last week.

PM Bologian lost that no-confidence vote, and PNL ministers withdrew from government. So, the situation now is that they're looking to form a new workable coalition, and a new Prime Minister needs to be picked by the President. So, there were headlines this week that a technocratic Prime Minister could be selected, and now we're sort of in wait-and-see mode, as progress to form a new majority has been a bit slow.

So, thinking about this all for local markets, clearly the political noise has picked up, and in Romania, political noise is kind of a mainstay of the market. We had a relatively long period of calm. Now, you can see it.

Local bonds have been underperforming peers in the weeks as the political pressure has been rising, and the central bank has let the currency depreciate after a long period of FX stability. So, there have been some market moves already into the event, and now markets are taking it relatively calmly. The longer-term question that markets need to grapple with in Romania is what happens to the bullish fiscal path, what happens to the EU fund disbursement, and what happens to ratings?

There are lots of different combinations and outcomes that could happen, but most of them fall into this kind of bucket where fiscal discipline for this year is maintained, EU funds can still be disbursed, and ratings downgrades can largely be avoided. There is terrorist lingo, but right now, the market isn't really focused on that. So, we're probably at a stage now where this ongoing political risk continues in Romania, but assets price some kind of premium for that, which seems reasonable given the developments.

So, that's Romania, nice and easy. Maybe let's see if it goes to South Africa. So, the story there is that the constitutional court recently ruled that parliament acted unconstitutionally in 2022 when it blocked an impeachment-related inquiry into the Pala Pala scandal.

This involved President Cyril Ramaphosa, where money was found to be stolen from furniture at his game farm. So, the latest developments there are that the ANC, which is President Cyril Ramaphosa's party, the national executive committee of the ANC has come out in support for Cyril Ramaphosa, which reduces risks of some kind of internal drive against him, and Ramaphosa himself has said that he wouldn't be resigning. The story is also emerging that the president may mount a legal challenge to the impeachment hearing.

So, I think now we're at the stage where we've had the first risks, and now we're looking at some kind of drawn-out political situation. So, there are some important contexts here. The first would be that the ANC, Ramaphosa's party, has been on this multi-year declining support.

So, the resurfacing of the scandal is quite untimely, particularly with local elections coming up in November. If Cyril Ramaphosa loses support, there are growing terror risks that he's replaced by someone which is perceived to be a less market-friendly candidate. Now, if we take a step back, you will recall that South Africa has been going through big structural improvements over the last year and a half, and Ramaphosa has been there throughout all these improvements.

So, the market is a bit worried that if he goes, can that long-term structural story continue with someone else as president? So, domestic risks are certainly heating up on the political front, but like in Romania, the South African local markets are kind of taking them in their stride. Rates have sold off, but rates have sold off everywhere, so it's not a South Africa-specific story, and the currency doesn't really price much extra political premia in our view.

I think we will be in a sort of wait-and-see mode where we have these terrorists lingering, again, a lot like South Africa, and we'll have to wait and see how it plays out. Thanks, Mike. So, Aneska, let me wrap it up with you, and Mike touched a little bit on the FX markets, but let's dive into those two FX markets a little bit more.

Those are certainly ones that investors pay attention to. How are these idiosyncratic cases, politically driven, interacting here with the global narrative that we're seeing for EMFX? I think it's actually quite entertaining to think.

So, we've had now political rates increase in Romania, South Africa, and let's say over the past few days, Brazilian politics has also come into focus. And when you think about these markets, actually the largest FX reaction has been in Romania, which normally doesn't move at all. So, I think there has been something very interesting that actually in the other markets, which provide carry and are not heavily managed, like Romanian currency, the reaction has so far been very small because of the global backdrop, precisely as you mentioned.

Whereas the one currency that trades more idiosyncratically, and it's not considered a carry or global beta, that's the one that actually did the most weakening. Now, let me go maybe more in detail. So, in Romania, it is a managed exchange rate regime, and the central bank is extremely good at keeping a framework.

So, when something happens to the Romanian currency, it's usually within some sort of framework that the central bank believes is correct. And we were quite surprised at the pace of depreciation that the currency saw. We thought it probably reflects the central bank judging that the currency is overvalued, as well as judging that the currency needs to reflect the underlying change of fundamentals or credit risks in real time.

Having said that, the move that we saw was actually one of the largest for Romania since roughly 2013. So, our judgment has been that it's very hard to chase that further. If it's already done more than in several other periods of political risk, that's probably it.

We cannot conclude with absolute certainty, because obviously the underlying situation were to deteriorate for whatever reason, not our base case, then obviously the central bank would again judge that the currency needs to reflect those risks. If I go to South Africa, for me, the main thing for FX is literally the probability you can attach on Ramaphosa leaving. As long as that probability is very limited, again, I think the FX market will trade on other drivers, and that's carry in global environment.

And finally, just a note, we didn't speak about Brazil here, but for me, the main thing, again, is the global backdrop and the time left to elections. As long as the time left to elections is still relatively long, on average, we have previously proven that elections are to dominate market price action about three months before the date. That's where usually these correlations pick up to election probabilities, etc.

Again, the reactions can be more focused on the global environment. Great. Thanks, guys.

Certainly two cases the market will continue to pay attention to, and that third one, Brazil, yeah, will be a dominant one for the rest of the year, I'm sure. So, that brings us to the end of this J.P. Morgan At Any Rate Emerging Markets Focus podcast.

Thanks to you, Aneska and Mike, for joining today, and thank you all for listening, and we hope to have you back with us again for the next one. This communication is provided for information purposes only. Please refer to J.P.

Morgan Research Reports related to its content for more information, including important disclosures. 2026, J.P. Morgan Chase & Company, all rights reserved. This episode was recorded on the 14th of May, 2026.