LIVE MARKETS-Goldman Sachs eyes EM rate rally as Fed cuts come into view

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GOLDMAN SACHS EYES EM RATE RALLY AS FED CUTS COME INTO VIEW

A surprisingly soft U.S. labor market report last week has triggered a notable shift in global interest rate dynamics, with ripple effects reaching deep into emerging markets (EM), according to Goldman Sachs.

The weaker jobs data has amplified concerns about the U.S. economic outlook, pushing traders to price in more Federal Reserve rate cuts. Goldman Sachs still expects the Fed to ease three times in 2025 and twice more in early 2026, but says market pricing could end up going even further.

Short-term U.S. rates have dropped sharply and the dollar has weakened — a combination that often breathes life into EM local bond markets, Goldman noted.

EM local bonds had a rough July, hit by expectations of a more hawkish Fed, a stronger U.S. dollar, and rising oil prices.

Countries like Czechia, Mexico, and Korea, which had underperformed, are now seeing broad-based rallies, Goldman says and it sees further upside for Mexico, Hungary, and Colombia, especially if U.S. front-end rates continue to rally.

Colombian bonds have lagged the EM rally, partly because its central bank (BanRep) struck a cautious tone after last week's surprise rate cut. Goldman believes that stance could soften later in the year if U.S. rates keep falling, giving the bank room to cut.

Still, risks remain. If dovish Fed pricing coincides with broader risk-off sentiment—driven by recession fears or inflation concerns—higher-beta EM markets could struggle. In such a scenario, defensive markets like Chile, Czechia, and Korea are better positioned to benefit.

In Asia, Goldman sees scope for easing in Indonesia and the Philippines, where real rates remain high and inflation is benign.

The shift in Fed expectations has turned July's headwinds into August's tailwinds for EM rates, with Goldman positioning for further relief across select markets.

(Joel Jose)

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