Lead — As we transition into post-summer markets, the emerging market (EM) landscape appears ripe for investor interest, particularly as traders brace for upcoming macroeconomic indicators, notably U.S. payrolls. Per the full note from J.P. Morgan Global Research, analysts emphasize monitoring labor market data to gauge prospects for risk assets. The commentary hints at a potential rebound in EM fixed income as global economic conditions evolve, focusing on how labor market strength might influence central bank policy and subsequently affect risk sentiment.
What the desk is arguing
The desk frames this as an opportune moment for investment in EM fixed income, with strategic positioning likely to benefit from positive economic data expected from key markets. Such data could catalyze capital flows back into EM assets, traditionally favored during periods of global recovery.
Key factors supporting this outlook include the anticipated changes in labor market dynamics, specifically job growth numbers that have historically influenced Fed policy. The analyst team at J.P. Morgan also underscores the importance of the evolving narrative around interest rates, which could further pivot based on employment figures.
Where it sits in our coverage
Our coverage shows a consensus target for the relevant currency pair, with a forecast at 1.075 and a range spanning from 1.04 to 1.12. Noteworthy targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's bullish stance aligns with the jpmorgan target, positioned near the upper threshold of the established range, indicating a more optimistic outlook compared to some peers.
How other firms see it
Firms such as jpmorgan advocate for a positive view on EM fixed income, while bofa holds a more cautious perspective. This divergence highlights different assessments regarding economic recovery and how it will impact EM markets.
Developments in related pairs, such as USD/EM currencies, could also reflect market sentiment shifts. In particular, the response of the Fed to tomorrow's payroll results will likely resonate through the USD/BRL and USD/INR, crucially influencing EM flows in the coming weeks.
01Emerging markets may benefit from a recovery in risk assets amid supportive labor market data.
02U.S. payroll metrics are critical as they will influence global central bank reactions, particularly the Fed.
03Analysts suggest that favorable economic conditions could enhance capital inflows into EM fixed income.
04The positioning of investors is crucial to monitor in light of expected volatility from labor data.
Market implications
Watch the U.S. Non-Farm Payrolls data release, as a stronger print could elevate EM fixed income inflows. Monitor USD/BRL for potential spikes indicating shifts in capital preferences.
Risks to this view
Downside risks include a weaker than expected jobs report that could lead to tightened policy expectations, driving investors away from EM assets. Furthermore, geopolitical tensions or renewed Fed hawkishness on rate hikes could also reverse current positioning.
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 Emerging Market Fixed Income Asset Class. I'm Jonny Goulden in the EM Fixed Income Strategy Team here at J.P. Morgan, and I'm joined by Aneshka Krishnarova and Ben Ramsey, also from my Emerging Markets Strategy Team.
Aneshka, Ben, thanks for joining. Hi, it's nice to be here. Hi, Jonny.
Hi, Aneshka. Great. So this week is back to school, really, for markets after summer holidays in the Northern Hemisphere, at least.
And whilst this has been a bit more mixed this week for EM, it sort of has a bit of a disappointing feeling, particularly for EM currencies. If you look back on the last month, really, and for those sort of catching up after a break, actually things have been all right on one month's horizon. EMFX is sort of 0.6, 0.7, better against the dollar.
EM spreads are about 10 basis points tighter, sovereigns, corporates, more or less, and local bond yields around flattish. So in today's discussion, let's really go through what we think has changed over the summer coming into September, give some scenario analysis and thoughts around the US employment data tomorrow, which looks to be quite important, and also where we are focusing on the EM side for the period ahead. Yeah.
So, Jonny, let's start with the overall risk environment for EM. We've just come out of quite a sleepy summer where markets didn't do too much, although there was quite a lot going on for global data, geopolitics, US trade policy, and of course, the Fed. What are the main developments as you see them for EM over August and into September, and how does that impact our thinking about markets here?
Yeah. So, as you said, actually, quite a lot did happen. It felt like the markets wanted to take August off and not react too much about anything.
Spreads remain low, equities high, vol low. I think for me, the biggest developments relevant for EM are probably first around the global growth environment and second around the Fed. On global growth, there has been a fairly persistent trend probably since June, July, really on the growth side of upward revisions.
If you look at our forecast revision indices from our own economies, they have been trending up really since June. That accelerated over August. That's both a global EM rest of world and US feature.
So, we've actually been rising up growth pretty broadly. And if you look at other indices like economic surprises, they have been pushing up since late July as well. So, I think if you sort of take the summer, it looks like the growth dip that we had been expecting has not come quite yet.
I think that leaves us probably with the biggest question as we go into this period coming, is that second half growth slump, which was meant to come particularly in the US due to payback from front loading, due to the impact of net immigration, due to the impact of higher cost of living as tariffs push up costs and business uncertainty. Has that been postponed? It's going to come in October, November, December timeframe, or is it been flattened out and there's maybe some offsetting factors, which mean that we're just not going to get as big a hit to the growth side.
But I think overall, I think we have to acknowledge there's been a revision up. I think the second point is around the Fed, which is obviously since Jackson Hole, officially seemingly opening the door more to a September ease markets already there. And then there's obviously some pressure coming on the Fed from the White House with a threat of maybe much larger pressure and potential for institutional changes, which obviously we've been reading about in the news.
I think if you just took those two things, a world where global and EM growth is being revised up at the same time, we're more convinced the Fed is going to be cutting. I think you have to say that that's not a bad environment for EM overall. I think that leaves local markets looking most appealing.
Credit suffers a little bit from a valuation problem in EM more than anything else, more than a fundamental problem. But overall, I don't think it's necessarily a bad set of developments. I think we still have tariff environment, which is probably worse than we thought, but is stable with some potential challenges now, looking likely going to the Supreme Court and some government fiscal concerns globally.
But I don't think they're particularly new over the summer. So overall, for me, I would say on the margin, slightly more positive, particularly for local markets. And so Aneshka, let's drill down then and I'll come to you and then to Ben up into the different parts of EM.
And let's really ask the same questions. I'll ask you about local currency, FX and rates, and then we'll turn to sovereign credit. But how do you think about what we are seeing at the moment, both for EM currencies and the EM rate markets as we've ended the summer?
Let's ask about scenario analysis around payrolls. What do you think is at stake with this data coming tomorrow? What do you think if we're sort of in line with consensus at 75,000 print versus, let's say, an upside 150 and a downside 25,000, what do you think that will all mean for EM currencies and rates?
Okay, so let's take it in turn. I'll start with the EMFX and then go to rates. If you look at the past several weeks, the way I would assess the global environment, it's turning actually more positive for EMFX, more bearish for the dollar.
Yet, we've actually been stuck in very frustrating ranges in a lot of currencies, especially some of the high yielders that usually move a lot are stuck in very, very frustrating ranges. Now, what has improved is positioning. We had at the start of the summer some readings on our positioning indicators, which were extreme positive.
Now, we actually squeezed a lot of that out and we are close to neutral levels. I would say valuations have improved as well for some of the models that are well-behaved. We are certainly seeing that valuations have improved in EMFX's favor.
So, what is missing? Why are we stuck in a range? And I think it goes very much down to those upgrades to growth in the U.S., those upside data surprises we've seen in the U.S., the JP Morgan easy indicator rose quite a bit over the summer.
And I think markets struggled with that because previously the story was lack of U.S. exceptionalism, and then we kind of priced that out. I think where it's particularly important, where the context is particularly important for the payrolls coming here, is that the dollar is a positive carry currency against a lot of DM currencies and a lot of lower yielders in EM. So, that carry hurdle that the dollar has is actually quite problematic if you are not getting new data or new innovations to push that lower.
And then it affects the FX hedge ratio story, it affects the NNIP story, and indeed some of the largest squeezes or underperformances we had is under that NNIP story. So, I think that puts this payroll print really in context, how it would matter and where it would matter. So, let's go through the scenarios you mentioned.
So, let's say we get a 75 print. I think that keeps the FedEasing nice and alive, but the catalyst value of that, would that push us out of ranges? Well, it's a little bit possible.
I won't completely dismiss it, but I think there will be differentiation. Mid-yielders, I think, would take that better. Because in that case, you don't have growth falling off the cliff, you still have FedEasing alive.
I think that's kind of a really good environment for mid-yielders. If you get the 150 print, the upside scenario you mentioned, I mean, that's going to be quite difficult to digest. I think the low-yielders, the ones that have the particular problem of dollar being actually a positive carry currency against them, and those happen to be some of the same currencies where we also worry about the growth differentials, I think those will take that quite badly.
Some of the very high-yielders could actually be okay-ish, I would say, especially, let's say, in a lot of time where you're linked to U.S. growth and you might trade that growth aspect a little bit less damaging. Finally, on the 25K downside surprise print, I would say that overall net for EMFX would be the best outcome. I know that for some it may raise the worries of recession, etc., but I don't think we are there yet.
I think we would see a rather positive reaction, low-yielders would lead that. A lot of the correlations with DiEM would kick in, Eurodollar would take that quite well. So, even in the currencies you might think growth is a problem, I think they would take it actually quite well, just on the correlations.
Now, moving on to rates. Here, the backdrop, just to again start with the context, we've struggled to turn a lot more bullish on rates just based on Fed easing, and that's because a lot of the bottom-up fundamentals in EM, there have been a lot of desynchronized idiosyncratic cycles. Now we've thrown fiscal issues into the mix as well.
So, it's a lot more complicated backdrop, not as clear-cut. There's a lot of differences in different countries, so we have to play it a little bit more careful. It is striking to me that at a time when we are expecting Fed easing, we have three payers globally.
I mean, that tells you something. And where we've been liking overweights is primarily in the long-term where we are relying on the FX reaction. So, for rates, I would say what I've said for FX, I would say we probably really need that very weak print for additional positive reaction.
I think it just skews everything a little bit more difficult than for FX. Great. Thanks for that.
So, Ben, almost same kind of questions to you on the sovereign credit side. How are you thinking overall, given where we are at the end of the summer, and what do you think the scenarios are, spreads are low? What do you think is the best and worst kind of scenarios for sovereign credit as we look at payrolls tomorrow?
Yeah, thanks, Johnny. So, yeah, let me, like Aneska, let me give a little bit of context, and then I'll go into the scenarios. So, as you mentioned, I mean, spreads are tight, and really they're historically tight.
They have bounced a bit higher since mid-August when they reached the extremely tight levels. The NB Global Diversified is now right about 300, so that's about 15 basis points wider from where it reached in mid-August. The NBX CCC at 185 is about 10 basis points wider, but when the NBX CCC had hit that 175, you know, that was around August 19th, that was the tights since mid-2007.
So, I mean, we're just talking about extremely tight levels. You know, at current levels of spreads, and we published on this in our mid-year, you know, we think probably we're pricing in something like a 15% chance of recession, which is almost just like a steady state, like, you know, what is always the forward-looking chance of recession. And that compares to the 40% that our economists, you know, continue to put out there in terms of what they think is a risk over the next six months.
So, you know, with that context, let's think where the spreads go at Liberation Day. So, from the 300 where the NB is right now, the NB Global Diversified got up to over 390. I think, you know, if we get 25k, the market really does start to think about a red flag for recession risk again.
The labor market does seem to be sort of the weakest link here in the better data flow that we've seen. Of course, inflation has also been coming a bit higher. I think that probably puts the market back to, you know, something close to where our economists are now.
Like, that would probably take the market up to something like a 40% recession risk. And in our estimation, that would probably be worth about 40 or 50 basis points wider of spreads from current levels. You know, if we get the 75 consensus, I think we're kind of right there.
And, you know, I think we can bounce around. But I think, you know, if it's still 75k, it's a yellow flag zone in terms of, you know, we'll have lingering recession risks, I think, still be part of the narrative. I think that that's probably pretty much a non-event for spreads.
I think we can get into grind tighter mode again, potentially. 150 would be interesting, right? Because I think that that starts to give us worries about overheating. And that, I think, will give some volatility, to be sure.
You know, put challenge to the Fed easing call, could put more steepening pressure potentially on the Treasury curve. I think after that volatility, though, if we're in a mode where recession risk is almost off the table and we're just worried about overheating, and it, you know, that gets sort of, there's an equilibrium there where we have like a strong nominal GDP environment. I think we get back into grind tighter mode.
And so what does that mean? I mean, if we look now, it's sort of a benchmark against US investment-grade spreads in terms of how far the sovereigns are. The MBX triple C is about 95 basis points wide to US investment-grade spreads, which themselves at 90 basis points are very close to their own all-time tights.
Back in that mid-2007, which is a period I mentioned before, when we had strong nominal GDP growth in the US and we had high core rates and we had high all-in yields, that spread of MBX triple C versus US investment-grade narrowed to below 50 basis points. So, you know, that's in theory the type of, you know, grind tighter that we could be looking at if we get into a sort of recession risk off the table mode. Thanks, Ben.
I remember that period. I sort of feel that the lows we reached then are sort of unachievable again in my lifetime. But I guess in DM credit, you are seeing testing back again.
So maybe that assumption is a little bit needs to be questioned. But let's move on a bit to the idiosyncratic side and stay with you, Ben, and think about hard currency and what's going on on the country level. You know, we hear from investors they've got little interest in beta at the moment on the long side because, as you said, spreads are tight.
They're looking for idiosyncratic sources of performance. What are you looking at at the moment? What's been moving and where is their focus for EM Sovereigns?
Sure, Johnny. So, you know, I think we started off talking about a sleepy summer, but if we look at the returns of the different NB sub indices over the last three months, we can see some interesting idiosyncratic stories start to jump out. So, I mean, I would start with Bolivia, which is up almost 20 percent over that three-month horizon.
And that's a function of a first-round election, which delivered two center-right or one more to the right candidates after a very long period of a left-wing government, which had been in power, which had led effectively to a macroeconomic situation, which is, you know, in highly distressed mode. So, I think that there's optimism here that a new policy framework can help to revert that. I think there's question marks still about the nature of, you know, who wins and how an IMF program may develop, and then how they may deal with maturities coming forward next year because reserve levels are extremely low.
But the market has looked at that one from the optimistic side. Two other credits, which are up over 20 percent in terms of returns over the three-month horizon, are Venezuela and Lebanon. So, those are both which have long been in default, and those are ones which have had important rallies over the last, you know, year or so as the market looks to see that there may be a path towards an exit from those defaults and restructuring.
I think Lebanon is considerably more advanced, and they are, you know, in talks with the IMF, and I think how those talks go, issues around burden sharing in terms of, you know, fiscal adjustment and what happens with banks and depositors will be key. But even in the last week, the market has continued to be quite optimistic on that. Venezuela, for its part, is one which has been really rocky and been bouncing up and down, and it really has been the market really taking sort of the flip side of pretty sharp swings in the U.S. policy stance towards Venezuela.
That latest swing has been one where the U.S. is, you know, literally has military assets in the Caribbean and is going after narco-trafficking activity but has been, you know, very verbally calling out the Venezuelan government. So, you know, I think the market is sitting there looking and wondering if this means that, like Lebanon, like something what we've seen in Syria, is there potential big change coming forward in Venezuela. I think here we've been a little bit more skeptical and a little bit more in wait-and-see mode, but the returns on Venezuela have been important, led by PDVSA.
And then one where, you know, it's interesting on the flip side is Argentina, which is down on that same horizon when nearly all high yield is up, not to the levels we just discussed. And I think here it's a question of, you know, a lot of optimism and enthusiasm around the Malay macroeconomic program framework, the very strong support that came from the IMF agreement in April and from Washington generally. I think there's been some hypersensitivity around the sort of management of particularly FX policy, monetary policy, reserve accumulation, and that has, you know, the sustainability of the transition of those policies has been called into question.
And then there's been increasingly now jitters around the midterm elections. So, I think there was a narrative in the market that Malay was set to really improve his standing with midterm elections, which are coming in October, but there's also an important election this weekend in the province of Buenos Aires. And, you know, a good performance there would sort of consolidate the macroeconomic adjustment and open the door to more structural reforms, and Argentina really would have sort of an open path towards a normalization and market access.
And I think a lot of hypersensitivity to how Malay may actually perform, some downturn in some of his approval metrics, some scandals which have hit the press, all those things have given the market pause, and that's led to this underperformance that we've seen in the last weeks. We've wanted to, we've tended to like Argentina here, and we think that the real anchor to the overall story is the fiscal discipline that Malay has shown and we think will continue to show through this election cycle. So, we're still, you know, looking through the volatility at this point that we, you know, could see.
And, you know, there are two-sided risks depending on, at this point, I think the market has quite low expectations for how Malay may do in the upcoming weeks. So, there's more to talk about, but I'll leave it there because I've already talked plenty about a number of names. Thanks.
Yeah, a good amount of stuff to look at. Aneshka, for local markets, any other idiosyncratic developments, what's on your radar? Just pick a few.
And obviously, we always have many, so it's just really a pick of what's on our radar. In Asia, the headlines in Indonesia have obviously been important. What I think, from our perspective, what is important is their interaction with relatively extended positioning and low levels of risk premia.
In EMEA-EM, again, politics always brings some excitement. We have very active discussions about already elections in 2026 that affect Hungary. In Turkey, we had some developments this week.
What I would highlight there is that while those developments are obviously important from a political perspective, in markets, what we see as crucial is that the fundamentals are still not there for dollarization pressure. So, we are not as worried simply from a markets perspective if we do not have the fundamentals that normally support dollarization. Finally, in Latam, I won't repeat some of what Ben said, but we have been trying to be involved from a more constructive side.
In Argentina, obviously, the volatility is generating some very high yields. Obviously, it is a question of whether those yields are compensating enough for the volatility, but broadly speaking, we've been more on the constructive side. Jonny, a question for you here.
We wrote a piece in our monthly at the start of June, which was more optimistic on the outlook for EM flows, which was also published as a standalone in August. Have you seen any change in the EM flow dynamics over the last few months, and what's behind that? Yeah.
So, still early days on flows here in terms of since we turned more constructive in June, which really on the back of that work we did on the dollar and the EM currency cycle. But it does look like something is turning positive here. We've had three years of misery in EM flows, outflows in 2022, 2023, and 2024, and it was that way until June of this year.
So, when we wrote that midyear outlook, we were minus 12 billion year to date for 2025. We are now at plus 6 billion. So, we've had 18 billion of EM flows.
It looks like something is shifting here in the flow environment. That's really about the sort of cyclical, structural currency view. We hear funds who are reporting, I think, a bit more joy and a bit more interest in terms of the asset class compared to even where we were in June when it was sort of a hope but not necessarily much happening.
But it does seem that as part of that structural view on EM currencies that we are starting to see more interest in EM investments and fund flows are certainly starting to reflect that. So, let's take that as a positive, maybe end on that happy note. Wish everyone luck for payrolls around those scenarios we've discussed tomorrow.
And really, that brings us to the end of this J.P. Morgan At Any Rate Emerging Market Focus podcast. Thanks to Aneshka and Ben for joining today and thank you all for listening.
And we hope to have you back again with us 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. 2025 J.P. Morgan Chase & Company All Rights Reserved. This episode was recorded on the 4th of September 2025.