Is a September Fed hike off the table? The yen rescue. EM risks.

It's Friday the 7th of August and this is your capital economics weekly briefing. I'm David Wilder coming up the latest on EM financial risk and that joint mission to boost the yen, but first group chief economist Neil sharing is with me to talk about that US July payrolls report was just came out a few moments ago and is roiling markets. Daniel, hi David, never a good sign if we've got a jump back on midway through the afternoon London time on a Friday to re-record an emergency podcast as it is. It's always Friday afternoon. I think we should move to the States at least when the payrolls report comes out. It's rather heavily in our democratic time. We're on this emergency pod when everyone will call it because a 23,000 drop in jobs in July versus the 1890s, 1000 jobs growth that had been expected to boot there with these big downward revisions on jobs growth in previous months. All in all, I mean, how worried, I'm looking at what's going on in the markets, how worrying is this report? Well, the first point to say is that as ever, the employment report comes with a bit of a health warning. Clearly, the markets focus on the employment report. For obvious reasons, it's the key piece of economic data for the world's most important economy, but it's also a very noisy series and we should never read too much into one month's data. So I'd actually put less emphasis on the 23,000 decline in payrolls, non-finem payrolls in July than on those down revisions that you mentioned. So that means that we now have a three-month average increase in payrolls of just 20,000 a month. So it's that there has been a slowdown in hiring. And what's more, when we look at the unemployment rates, the unemployment rate ticked down to 4.1%, but for the wrong reasons, that was because labor market participation fell pretty sharply. So we've got a combination of a slowdown in payrolls growth alongside a drop in participation, which does not speak to an economy that's seen really rude health and would necessitate a big increases in interest rates. So this isn't the type of report that you want to see if you're one of the more hawkish members of the FOMC and want to argue in favor of higher interest rates. I mean, how does this fit into the broader narrative of a US economy that you've said on this podcast only recently is in a fairly good Nick. How does that feed into that? Well, again, there's only one piece of data. So we're coming off a week where we've had some business surveys. If we look at the ISM manufacturing and the ISM services, the composite of those two indices currently points to GP growth in the order of 2% Q&Q annualized in Q3. So the type of growth rates that economies in Europe can only really tree-revide. If you look at the latest measure of the Atlanta Feds GDP nowcast, that has GDP in Q3 at rates of more than 5%. Q&Q, annualized now. Again, we don't want to read too much into one piece of data. But I think the broader point here is that this is not an economy that is really struggling and certainly not to the extent that the drop in employment in July would suggest. So my sense is the economy is doing pretty well. It's doing pretty good Nick, as you say. 2% Q&Q growth looks and feels about right. For the US economy at the moment, maybe it's a bit stronger than that in Q3. It's probably not as strong as the Atlanta Feds GDP nowcast, but no, it's as weak as the July employment report would appear to suggest the first site. You mentioned the FOMC. So if markets are playing the ball to borrow the somewhat controversial analogy of the new Feds controversial, let's leave that there. That's not good. If you are focused on the data, how do you think this influences what the Feds does come September? As you know, we've been forecasting a September rate hike for a while. I think it's fair to say now that looks of stretch on the basis of disemployment reports at least. In order to get that September rate hike, I think we're likely going to need some pretty strong inflation numbers. I will get CPI numbers over the coming week. For July, we're forecasting the 0.2% month-to-month increase in core prices that takes the core inflation rate to 2.4% year-on-year. Probably not strong enough to justify a hike I wouldn't think. Warsh quoted in the FT over the past 24 hours saying that he's not averse to a rate hike. If they get further evidence of mounting inflation pressures, but I don't think that would necessarily constitute bad evidence. Then we'll get the PPI data in a couple of weeks' time for July that will enable us to form a view of what PCE and core PCE looks like in July. But again, it's going to need to be pretty strong in order to justify that September rate hike. Absent to a really big rebound in the jobs numbers in the August Deployment Report, which will land just before that September, FYBC meeting. I don't think it's completely off the table, the September rate hike, but it's now looking unlikely. Absent are really a couple of shocking inflation numbers. With all that being said, I think when we look over the next 6-9 months, the balance of probability is still skewed towards rate hikes, rather than rate cuts in the US. Perhaps it's more of a stretch for a September hike now, but I still think that the next move in rates is more likely to be up than day. Neil Shearing on another US Employment Report shocker and what it means for the Fed come September. As Neil said, we hopped on the mic shortly after the data release. We had actually spoken earlier in the day with Jonas Golteman, our Chief Markets economist, about news of a Japanese US move to strengthen the Yen, and here's that conversation now. It's payroll's release, and I've got a to-do list in front of me with just one item. Talk to Neil and Jonas about the Japanese Yen, just to be sure I've written JPY in brackets. Do you see what I did there? I did. I saw you did. Yeah, how much are you buying? If you were not five to ten billion. No, more like five dollars. Yes. A reference, obviously, to Treasury Secretary Scott Bessons, none to subtle signal to the markets last Friday about US intervention with Japan to try and support a weakening Yen. Jonas, let me start by asking you why now? Why? Because we were speaking just a couple of days before that to clients. You're doing a briefing to clients about what was going on with the Yen. Potential intervention with Marcel Tiliant, our colleague, and at the time, the Yen was sort of one sixty-three-ish to the dollar. So why is this the moment for the intervention, and will this time be different? Is this going to actually turn the currency around? Well, it certainly feels like Groundhog Day, doesn't it? This is the six-time in the past four years or so that the Japanese didn't do in support of the Yen. Only three months ago since they were doing it at the end of April, that didn't work very well. After all, the Yen was weakening within a couple of weeks and back to one sixteen, and three one sixteen, indeed, pretty quickly. This time around feels like the timing is a bit better than in April. They have a few factors working in the favor in terms of US rate expectations, which had been rising recently, sort of stalled out. Higher NH surprises have been putting down pressure on the Yen as well, and then we've had some good news on that front, obviously, with what's going on between the US and Iran. No one really knows, but oil prices have fallen a bit, so that's helpful for the Yen. Of course, the Japanese have brought in some help now with the Americans getting the Americans on-side, which, you know, matters symbolically, I think. So they have a better chance of achieving at least a longer period of the Yen not falling to another all-time low within the next couple of weeks, I think. But ultimately, I don't think this is going to generate as the same turnaround any more than the previous rounds of intervention. Dead, I mean, everyone knows, I think, we've made this point many times, the average intervention is a sticking plaster, it's not a permanent fix. And that's not just us, I think that's a widely understood concept in economics. I think the Japanese standard very well at this point. And that's in to myself, said as much on CNBC earlier this week, what you need to see as the lasting shift in exchange, right, is that the underlying economic trends and policy settings shift. And in this case, what that means, certainly on the Japanese side, what that means is the B&J tightening monetary policy, more significant leap outs a bit more rapidly than they've been doing recently. It probably also means the Japanese government taking a more reassuring approach on fiscal policy, you know, as much I'll put out an excellent focus earlier this week, so looking at that issue. And the basic point is that, well, the numbers don't look that bad at all. In fact, they're improving on Japanese fiscal. But the vibes are bad and getting worse because of the way the Turkish government is communicating around the fiscal policy. Yeah, there is a risk that they really go for a blowout there, so they need to do something bit different on both monetary and fiscal policy in Japan in order to get the end to turn around on a sustained basis. The involvement of the U.S. Why do you think the U.S. has got involved now? What's the rationale for a joint approach? Well, I think the first thing to say is that U.S. involvement is in terms of the dollar amounts that they were bought fairly limited. I know if it's those five to ten billion, that's a lot less than what the Japanese did just this round, which is more like 80-90 billion dollars. And it's even more than that if you come to cumulatively. But of course, use some moment matters symbolically much more than perhaps they can bring the firepower that they can bring to the table. And it's the first time they've done this for a very long time. I mean, the U.S. really, in most major economies, so shifted away from using currency event intervention as a policy tool in the mid 90s, because it was seen as not all that effective and potentially quite costly, including politically. And they haven't done that, you know, they'd last on the US intervals involved in currency intervention was in Japan again, but in 2011, and at that point, they were actually acting to weaken the end, because the end was exceptionally strong at that point. The best thing, of course, at that point, was the head of the manager and taking the other side of us, he was betting on a weak end, quite successfully. But I think the reason they've done it now is, you know, maybe several things line up. The Japanese need help. The Americans, I guess, best sent them particularly at once to create a quick win. Maybe there is some similarity between what they've done here and what they did with Argentina last year, propping up the Argentinian peso ahead of an election there, you know, again, there was a quick win and just reasonably successful politically. And obviously, Japan's government is also aligned with the US in the same way. So there is an element of just helping a friend out here. There's lots of speculation, as you suggest, around American motivations for this. Neil, let me ask you, because one of the questions centers are not why, but how they intervene, particularly the US selling euros to try and push up the yen, some saying that this is because Besson didn't want the Japanese selling treasuries to support the currency and that this somehow reflects an insecurity about the health of the US treasury market. What do you make of all of this speculation? Well, there's possibly something in all of this. So I have to say, there's been a hundred hot takes on this coordinated intervention. And I'm not sure I necessarily buy any of them being honest that we've seen over the past week or so. Very often, when we see these kinds of interventions quite quickly, the commentary discerns into the weeds of the market mechanisms of how it works and significance of different instruments that are used and mechanisms that are being used and what we might interpret from that. And I think often that there's a lot less to this than they might meet the eye. So yes, possibly the use of euros might signal a bit of concern that by sending dollars into this market. It puts a bit of outward pressure across the curve, but as journalists just said, the numbers involved are pretty minuscule when it comes to the total global flows in capital markets. My sense is actually it's just a bit easier for the US to sell euros than dollars given the composition of its of the US holdings. So when we too much as it happens into the fact that they've sold euros, I think another aspect in all of this is that people have rushed into suggesting that we're now in a new era of coordinated foreign exchange intervention. So we've had that as Jonas mentioned, the intervention with Argentina to support the peso. Now we've had intervention, coordinates intervention with Japan to support the yen. So we're apparently in a new era in which the US is stepping in to help allies support currencies and in a new era of managed exchange rates. Again, I think that's a bit of a stretch if I'm being honest, I think it's slightly miserable what's going on here. Much more likely as Jonas was saying, US is just stepping into help a friend and numbers involved are quite small. I probably wouldn't over-interpret that. Of course, the big issue here is that the big currency of this alignment, if we are in a world of great currency intervention, the big currency of this alignment is with China, not with Japan. Yes, so in this world of hot takes, I'd wonder what good one to raise is Barry itingreen, who's sort of the miven on global monetary flows in the FT. I wouldn't consider him usually a source of hot takes, but he's in the FT saying that the real message in this intervention is that he put diversifying out of dollars. The dollar is losing its status as a reserve currency, and we better get used to this because this is a trend that's only going to accelerate. Yes, I feel a little bit kind of wary of pushing back against what I can green saying because he's kind of one of the great modern economists, right? But I do think in this instance, again, it's slightly overdone. That's not to say that the dollar has lost some of its appeal, not just as a reserve currency, but frankly, as the dominant currency in the global economy. And that's for a number of reasons, including the way that US macro policy is being run, but also concerns around institutional drift in the US. And if you're on the kind of China side of the global economic fracturing that we've been talking about, concerns about an increasing willingness to kind of weaponize the dollar if you're a US adversary. So look, I don't doubt that the US has lost some of its appeal, certainly compared to say that the 80s, 90s, 2000s as a global reserve currency and the world's dominant currency. The issue I keep coming back to is what's the alternative. And the example I keep invoking here is that the dollar is a bit like to global currency markets, what democracy was to Churchill's way of organizing government. That is to say the worst of all systems apart from all the alternatives that, you know, the dollars, the worst of all the reserve currencies apart from all the alternatives. So I don't see a really viable alternative of the dollar. So yes, there'll be a bit of diversification at a dollar. At the margins, the use of the RMB will increase at the margins. But if you wind a clock forward 10 years, the dollar still going to be, I think by far and away, the world's dominant currency. Jonas, you and Neil both mentioned this idea that the US intervened to support Japan, because Japan is a friend, you know, the Japan is an ally of the US. But the reporting I'm seeing this morning is that the Treasury Department didn't tell the Europeans that they were selling Euros, and well, at least they didn't tell them until after the fact and that the Europeans are a bit upset about this. What does that say in terms of global monetary cooperation? Well, I guess the first thing it says is that the Americans get along better with Japan than than with Europe at this point. At the same time, I wouldn't make too much out of that. I mean, this kind of operation you want to maintain secrecy until the last moment is one aspect. And also the fact is that it isn't that much in terms of the euro. And the way the Americans have framed it is very much this isn't support of the yen. It's not against the euro at all. It just happens that euro is what the Treasury has available in the exchange stabilization fund, which is the most flexible tool. It has available to conduct this kind of intervention. This is more or less fully at the discretion of the Treasury and the President's been in place since the 1930s. So it's a very useful tool. It so happens that the euro's are what's in that fund, euro's in the end, which is itself, I would say, an endorsement of Europe as that, you know, second or second reserve currency out there. Then the other point that the President has made is that, look, this makes sense to support the Japanese, but this selling euro is in favor of yen. It makes sense to him as a portfolio management decision. The yen is, you know, exceptionally undervalued as his view. It's also our view. It's pretty widely held one. DRA is more like cult around its equilibrium, or you could expect it to be in the longer term. So implicitly what he's saying is that this is a sound decision in terms of allocating the US reserve, which he's probably right about over a sort of a million term horizon. So I don't think we should read too much into this US moving against Europe. That's not how they framed it. I don't think the Europeans really see it that way. They just like to be, you know, you like to get the phone call before something happens, rather than afterwards, which is, you know, that there's a point of diplomacy as much as anything else. I do think that there is one striking aspect of the response in Europe, which had caused a little bit with what Jones was just saying, which is the reporting, the stats saying reporting in the FT, quotes one European policymaker as saying it's quote unquote sad that the US had sold Euros as part of this intervention. But the point is if you aspire to have a currency that is truly a global reserve currency, then the reality is that other countries will buy and sell that currency on a daily, weekly, monthly basis. So actually, the fact that the US was holding Euros, the fact that the Euro is relatively strong. And so from a portfolio management decision, it made sense in Besson's mind to sell Euros. To my mind at least, it's a positive for the Euro, not something that is kind of quote unquote sad, then the end of Europe's just somehow kind of feel hard done by all my mind. That's a good point. That's exactly the point that darking green was making in his piece that the ability to sell large amounts of reserve currency is indeed one of the most important aspects in he was saying that. The dollar is losing that and I don't think he's quite right about that. But, you know, as you're saying now, if the Euro wants to be reserve currency, you need to come up with the idea that people sell good chunks of your currency from time to time when they need to. And the final point to make on this is, well, you know, if you pick up the phone to someone in Europe late on Friday in August, you may get an out of office of a message. I presume you stand a much better chance going hold of someone in Europe than you would from someone in Beijing. And I say that because you guys are talking about global monetary coordination, global monetary cooperation. Neil, you mentioned the RIM in B earlier. That's the 800 pound gorilla in this discussion, isn't it? When we're talking about the sort of global monetary system, presuming we're not going to get a joint US China mission to appreciate the RIM in B, what's the answer there in terms of its widespread understanding of how undervalued it is and what that undervaluation is doing in terms of fuel and global imbalances? Yes, this is another kind of discussion that's been developing, hasn't it, was the commentary at and the talking heads over the past couple of weeks in global macro, that they're done as to say. The role of the Remimbi in driving global imbalances and the extent to which an appreciation of the Remimbi would resolve those. And again, I think there's just far too many hot takes in this area, I have to say. I mean, if you're thinking about how undervalued might the Remimbi be, there's different ways of measuring this, Jonas and his team have got those different metrics. You might say it's somewhere between 20 to 30% undervalued and they're kind of real trade-weighted sense, perhaps, but it's very difficult to put a precise number on it. The key point, I think, though, is that although a stronger Remimbi is a necessary solution, part of any kind of package to narrow global imbalances, global trade imbalances, is not sufficient in and of its own, because you also need to see a rebalancing in policy, not just in China, actually, to reinvigorate domestic demand in China, but also a corresponding adjustment in policy on the deficit countries, particularly in the US. There's some fiscal retrenchment there. Now, to understand why we put a note out at the back end of last week, kind of using the Swan diagram framework, named after an academic economist Trevor Swan in the mid-20th century, who had this idea that you had an internal balance to an economy and an external balance to an economy. So the external balance is the trade part here, but you've also got to keep economies at foot employment and without having a very high inflation. So if you just get a stronger Remindy, then what that's going to do, all other things being equal, is push China deeper into deflation. You need to reinvigorate domestic demand in China's economy, too, to keep it then of unemployment. Likewise, if you then end up with China with a stronger Remindy and at foot employment, and therefore a weaker dollar as well globally, and then the US is at foot employment, so you're going to get an inflation problem in the US with a weaker dollar at this stage. So you need to see some fiscal retrenchment in the US that will help to bring it's, correct, I can't deficit it in, in two. So to get back to our question, I'll discussion about exchange rates and currencies. Yes, you're right that the Remindy is the 800 pound gorilla in the room, and yes, if we want to see some resolution and some narrowing in global trade imbances, part of that adjustment will have to be a stronger Remindy. But in and of itself, it's not sufficient. You need to see policy adjustment in China, that is to say, to reinvigorate the rest of the demand that gets saved in China, but also in the US too, some fiscal retrenchment there as well. There's all these Galaxy braintakes about why the Americans have done this. But one thing that Bassant mentioned is that he spoke about regional financial stability, essentially, in the end being an important linchpin there. Now, obviously, one thing he means there is other major Asian currencies like the Korean War and the Taiwan dollar have been weak recently. And Bassant made a point about Korea a few months ago, several times actually over recent months. But the one he didn't mention, but I think it's quite relevant is the Remindy. The Remindy is very weak, but it has been in global terms, but it has appreciated the past year or so. It's actually about five percentage points in real trade ways of terms over the past year, which is essentially unwinding the trade war shock that we saw in the pistols of Trump administration, which is he had China worse than others. But the point is that the Remindy is on the right track, and that, of course, is a much more heavily managed currency. It's a change. It's essentially a policy decision by Beijing. But I think Bassant may perceive, and he may be right about this, that the Chinese will not want to see more Remindy appreciation if the yen and other currencies in the region like the one on the Taiwan dollar are still exceptionally weak. So by supporting the yen, you're sort of indirectly sending a bit of a signal to Beijing that, you know, look, we'd like to see a stronger Remindy. We know that's the balls in your court. But here's something that we can do to help help you out there on that front. So there is an element there where interests align, even if you're some China art on the best terms, they may have a common interest here. So you can see a path where supporting the yen and other currencies in the region indirectly points towards a somewhat stronger Remindy, not nearly enough to sort of not the 20-30% that Neil was talking about. But if you get, they'd say another five percent on the Remindy in the next year or so, that would help alleviate those imbalances even if they don't resolve them. Let's end with the yen. We're about six weeks away from the Bank of Japan's next meeting. There's still lots and lots of focus on Prime Minister Tucker. You cheese policy intentions. Where does the yen go from here? Would we expect more intervention? How much needs to happen on the policy front to sustainably boost this currency? Our best guess is that it goes sideways from here that the threat of further intervention and perhaps actual further intervention a few months down the line becomes necessary again. But really the Japanese have shown that they are going to tolerate a US dollar yen rate significantly weaker than 160. So I think that is setting a floor, continues to set a floor for the yen against the dollar. And I think the next few months the pressure is going to be towards a weaker yen because you heard the Fed turning more hawkish in the US. We don't know what's going to happen, damage prices but there's certainly a risk there. But the main thing is, as long as the Fed is hawkish, there's going to be a put pressure on the dollar and against all currencies. So the big question is what does the BLJ do about that or how does the BLJ respond? And they at the last policy meeting did open the door to accelerating the pace of policy tightening in Japan. We think they may hike at their next meeting in September, which would point to a faster pace of tightening previously than essentially doing two hikes per year. Now maybe they'll do more of a pace of three or four for a brief period. We think they will bring it to the policy rate up to two percent next year from about one percent now, which it's still considerably less than in the US and the rest of the world, most of the rest of the world. But it would bring Japanese monetary policy towards a more or less neutral stance for the first time in more than three decades. It's big deal for them. And I think that would again help put a floor under the end in the near term. And if you roll the clock forward, say 12 to 18 months, our assessment is that the US economy at some point will start slowing down. The US equity market will hit a bit of a ceiling next year. And once that happens, I think the tide will turn more sustainably. It will turn towards fed using policy rather than tightening. And that will certainly help in combination with the BLJ at neutral that ought to turn the tide on a more sustained basis in the favor of the yen. So we have the dollar yen exchange rate at the end of 2027 coming back to 150 and then stronger towards 145 and pounds much more than that. Because if you look at the fair value assessment for the yen, it's more like 130 maybe, 120 seconds a dollar. So that's a long way to go. Jonas Goldzmann and Neil Shearing on the yen, the dollar and the remin B. I will add a couple of pieces on the yen question to the podcast notes, including that focus report on Takaiichi's policy agenda by Marcel Tillion that Jonas referenced. If you're wondering what's next for the yen, for Fed policy and the dollar or for the remin B outlook, head over to our platform capitaleconomics.com and start a trial today. It's as easy as registering your details and hitting go. Now our EM financial risk indicators are a pillar of our emerging markets coverage. These indicators measure currency banking and sovereign risk across EM's and their available via an interactive dashboard the Lentz clients do deep dive analysis all from a downloadable data set. They're updated regularly and I caught up earlier in the week with Liam Peach, a senior economist on our EM desk and the lead for these indicators to find out what the latest read says about how these economies have been holding up in the face of high energy process. I think the big story from the risk indicators for Q2 which we published last week really was that we didn't see any emergence of new risk, currency crisis risks generally have not increased, banking risks at the emerging market, aggregate level have actually fallen slightly over the past year or so. We have seen a little bit of a tick up in sovereign default risk but that's really in just one or two countries. So I'll view it really as fairly strong resilience in the face of the energy shop that we've seen over the past quarter. I think where we have seen risks increase has really been in those oil importing emerging markets with existing external vulnerabilities. Turkey really stands out here. Experience quite a big jump in our currency crisis risk indicator last quarter is a lot of fundamental reasons for that. Foreign exchange reserve coverage is now looking quite low on all the metrics that we're tracking. It's coming into the backdrop of a widening current account deficit. So Turkey we have identified as one of the more at risk countries so the oil shock and that's certainly playing out in the data. But really I think currency risk in Turkey maybe we could also include Egypt in their Argentina to other countries that we think are potentially more vulnerable to large currency depreciation than other emerging markets. The story is still pretty solid and the energy shock has been pretty large in large parts of emerging Asia. They've been hit hard by the rise in oil prices but they came into the shock in really strong position. The external positions were supported by very large foreign exchange reserve of coverage, and also the fact that many of these countries are running trade surfaces and that's been boosted at the same time that's not forget by this growth in electronics exports driven by the AI boom. That's really how to cushion a lot of the impact on and some parts of the emerging market world as well. So I think that's really how we've seen the oil shock filter through. It's really been in those countries with net energy import positions and existing vulnerabilities. I think the other story that emerged from our refresh from the indicators last week is that some countries have experienced a bit of an increase in banking sector risk because there's been existing credit booms lending booms that are now coinciding with a period of quite high interest rates. And that's generally been something that we've seen that's preceded E.M. banking crises in the past. The tightening financial conditions against a backdrop of a credit boom is something that has been the trigger for past E.M. banking crisis and it does concern us now. Turkey, Russia, Brazil, three countries that really fit into that category and which we're monitoring now given that nominal and real interest rates are quite high. Turkey was one country that moved into high banking risk in the last quarter. Russia we identified as high banking crisis risk way back in 2024 when nobody was really talking about it but now it's certainly emerged that there are pockets of risk in Russia's banking system that our indicators had managed to identify an advance and still show some vulnerabilities there. So are you forecasting outright crises in these economies? So the point in these countries were not specific and forecasting them to experience a crisis. Our indicators were created really just to identify the conditions and which a crisis could happen. And those three countries that I mentioned are now showing up towards the higher trend of risk indicators. So they are experiencing a lot of the pressures that have tended to proceed E.M. banking crises in the past but there's no perfect gauge of assessing whether not the country would experience a crisis. There's a lot of other things that will go into it. There's external conditions, the general backdrop that's not being captured in our indicators, what's happening with sort of global financial conditions, the general state of business cycles in these countries. There's a lot of factors that could help to suppress actual risk in these countries. And our indicators have generally been pretty good at trying to identify these countries that are more vulnerable than others but it doesn't say that country is going to experience a crisis in the next few years. I think we're fairly encouraged for example that banks in these three countries have fairly large capital adequacy ratios and that leaves them in a pretty good position to absorb any losses that could come from some of the pressures that we've already identified. So again, it doesn't tell us that the crisis is going to happen but it's really helping our clients and helping our readers try to identify where crisis risks are more prone in some countries than others and whether or not that risk is adequately being reflected in market pricing or in the macroeconomic outlook. You've mentioned the energy shock, the exposure of certain economies to high energy prices. If we get a sustained reopening of the Straits of Hormuz, a restoration of energy flows, how does that change the narrative for these economies that are reliant on imports of energy but also those that are reliant to some extent on exporting energy? Yeah, I think in general when we look at our risk indicators across emerging markets, currency crisis risk on our average is higher in oil importing countries than it is in oil exporting countries. So all else equal, the fall in the price of oil should generally be good for emerging markets but again, it really depends on the extent to those vulnerabilities and oil importers versus oil exporters. Asian countries would certainly benefit from an improvement in their terms of trade, it'd be very good news for Turkey and Egypt, two of the countries that we've identified as the highest risk of currency, large currency depreciation. Some of the big oil exporters that would lose out, maybe the likes of Russia, Nigeria, parts of the Gulf, for example, are only really Nigeria and Russia that do have some existing fiscal or broader macroeconomic imbalances that could be aggravated in a prolonged period of low oil prices. The Gulf states, they have pretty shun buffers, they could manage that. So I think overall in terms of financial stability risks, I think a period of lower oil prices were generally good news for emerging markets and how to keep our measure of currency crisis risk and broader financial risk at the low levels that we've seen over the past year or two. Does sound like the sort of the broad message here is a positive one in terms of levels of EM risk and we're speaking after, again, this series of shocks to the global economy in recent years, you know, you had the pandemic, war in Ukraine, war in the Middle East. I mean, this is made for a really volatile environment for these economies. There was a time when you would have thought no doubt these are triggers for, you know, the sort of the EM crises that you saw in the 80s or the 90s or the 2000s, but for the most part, these economies have come through them. Why do you think things have been relatively quiet in the EM space despite all of these reductions in the global economy? Yeah, it's a good question, David. I think most importantly, these economies now just better managed and they have much stronger foundations than they had in in previous decades in the in the run up to previous crises. We've seen the adoption of flexible exchange rates across the young world, credible inflation targeting frameworks, all of this makes countries more resilient in the face of shocks, but also the underlying fiscal positions, external positions. It also just leaves countries in a better position to be dealing with these types of external terms of trade shocks. Now, I think what I would say is that if we were dealing with a prolonged period of oil prices in the range of $150 per barrel, the story would be different. I think that's something that would lead to more strains and external positions across emerging markets, not just in those countries that are already high-risk, Turkey-Egypt, but also in a lot of those countries that are still fairly low risk at the moment, but whose buffers would be chipped away at if oil prices stayed high for a prolonged period of time. So I think those are the two two big things. The energy price shock has been large, but it hasn't been large enough to really squeeze the balance of payments positions, but also we were coming into this shock in pretty good shape. I think the fact that our currency crisis indicator for emerging markets was at its lowest level in over two and a half decades is really telling you something about EM resilience coming into the shock. I tell you to get this question a lot, they're putting the energy risks to one side. Do you wear the other sort of trip wires that could lead to an EM crisis that sort of we've come to understand? I think the last major crises that emerging markets face really was that post-pandemic Fed tightening cycle which led to quite a big reassessment of US interest rates, but also interest rates and developed markets more generally. That came on the back in inflation boom, and what we did see 2022-2023 was the emergence of debt to stress in large numbers of emerging market world, particularly in frontier markets in Africa. But that, as we know, led to a wave of sovereign debt defaults, a lot of countries had to seek out the sovereign debt restructurings. It's been pretty painful for those emerging markets that have experienced that, and of course part of the reason they experienced that was because they borrowed a lot in foreign currencies during the previous decade when interest rates in the US were very low. It's unlikely I think that we're going to experience another situation like this, even though we're now talking about the possibility of US Federal Reserve hiking interest rates again, I think a lot of the vulnerabilities that were exposed by the Fed tightening cycle a few years ago are just not there in a large number of emerging markets in a way they once were. So overall, sovereign debt rest generally aren't jumping out to us as a big concern at an EM level. I think we are still very much concerned about sovereign debt positions that are more slow burning in nature. So these are the likes of Brazil, Colombia, Hungary, Mexico. You can also have the Poland and Romania in there as well. These are countries that run very large budget deficits. I think the real key question isn't about sovereign debt default, but it's more about long-term debt sustainability. And that's something that hinges in part on the average level of interest rates of which you need to roll open the cheering debt. If there were to be some global shock, whether it's triggered by a big reassessment of US interest rates because of the health of the US economy, maybe some concerns about fiscal credibility in the US itself, that would spill over pretty quickly into emerging markets, pushing bond yields up in a range of places. That's something that could aggravate a lot of those sovereign debt positions in those countries that are dealing with those most more slow burning long-term debt problems. If we think just finally about banking risks, the last real EM-wide banking crisis was probably the 2008 financial crisis, which then swept through large parts of Eastern Europe. The banking crises that we've seen in emerging markets over the past 20 years or so, they haven't really been EM in nature. They've been very much country-specific problems. So I think it's unlikely at this stage, as we're looking at the numbers and the vulnerabilities, to make the case for an EM-wide banking crisis, I think if they were to emerge, there'd be fairly isolated events in certain countries that are dealing with some banking [BLANK_AUDIO] abilities. I think it's unlikely that spillovers from one EM banking crisis to another EM would be pretty large. Liam Peach on our EM financial risk indicators they are available to subscribers of our EM service as well as full access clients. So if you want to see for yourselves do take a trial of our product today www.capitaleconomics.com. In the meantime I will add Liam's report on EM risk to the podcast notes. But that's it for this week. We will be back next week with more from the world of macro and markets until then. Goodbye.