Fed enters blackout and China pledges $50bn to Africa

Welcome back to SovereignBeat!

• Yield curve un-inverts: Signs of growth on the horizon?

• Unemployment drops, but August job gains fall short

• Oil plunges 7%, but OPEC stays firm on production plans

• Turkey bids to join BRICS, eyes global shift

• Xi Jinping pledges $50bn to boost African economies

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: The yield spread between 10- and 2-year Treasury notes finally turned positive, reversing the two-year inversion that had fueled recession concerns, after the July JOLTS report revealed a drop in job openings to a three-year low on Thursday, boosting expectations for a 50 bps rate cut and a total of 125 bps in cuts for the year. The 10-year U.S. Treasury yield closed the week at 3.72%, its lowest level since June 2023, down from 3.92% the previous week.

• The biggest news of the last week came from Friday's nonfarm payroll report published by The Bureau of Labor Statistics, revealing the U.S. added 142,000 jobs in August, with the unemployment rate dipping to 4.2% from 4.3% in July. While below economists' expectations of 165,000 jobs, the figure surpassed July's revised 89,000. August's job growth aligned with recent averages but marked a slowdown from the 12-month average of 202,000.

• Governor Christopher Waller and New York Fed President John Williams both backed a series of rate cuts this year, citing easing inflation and a softening U.S. labor market. With rising "downside risks," Waller emphasized that the economic environment "requires action" to prevent undue harm to the labor market, which he noted is "softening but not deteriorating." He stressed that the economy remains "solid" with "good" growth prospects and expects that rate cuts will be implemented "carefully." Waller's remarks, combined with the nonfarm payroll data, heightened the probability cuts, as markets, driven by recession fears, interpreted his comments as a signal to frontload cuts. However, we view expectations for a 0.5 percentage point cut in September as an overreaction. Market pricing currently indicates a 70% probability of a 25pbs cut on Septemebr 18th and 30% probability of a 50 bps cut. Starting September 7th, the Fed entered its 'blackout period,' during which FOMC participants and staff refrain from making public comments or granting interviews until September 17th.

Equity Markets

• U.S. stock indexes experienced some of their steepest weekly declines in over a year, with the NASDAQ falling 5.5%, the S&P 500 dropping over 4%, and the Dow down 2.5% as of Friday’s close. Technology stocks were particularly affected by renewed concerns over the short-term profit potential of artificial intelligence. Historically, September has been one of the worst months for stocks, averaging a 0.7% loss since 1950. In recent years, the S&P 500 has declined 4.9%, 9.3%, 4.8%, and 3.9% in September over the past four years. This phenomenon is partly due to traders returning to the office after the summer vacation season and adjusting their positions to manage risk. The week's heavy economic calendar also put downward pressure on equities as markets worried that the Federal Reserve may have delayed too long in easing monetary policy.

Commodity Markets

• Oil: The price of Brent crude oil dropped more than 7% for the week, reaching its lowest level in about 14 months, trading around $71 per barrel as markets closed on Friday. Concerns about weakening demand in the U.S. and China contributed to the decline, with prices having been above $80 as recently as mid-July. Additionally, following last week's news on production and export shutdowns, reports suggest that Libya's rival factions may soon agree to resume oil production, potentially adding over 500,000 bpd to the market.

• On Thurday, OPEC+ postponed its oil supply increase by two months, but this failed to reverse the steep drop in crude prices. Member countries will not raise production by 180,000 barrels a day in October and November, though the plan to gradually revive 2.2 million barrels a day over the next year remains, with a new target completion date pushed back two months to December 2025. This week price drop shows that the delay hasn't changed market views on surplus production and stagnant demand.

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Global Finance

• Turkey: Last Monday, the country officially requested to join the BRICS group to boost its global influence and broaden its international partnerships beyond Western allies. This action by President Erdogan's administration represents a strategic pivot towards engaging more with emerging-market nations, underscoring Turkey’s ambition to play a prominent role in a multipolar world while continuing to fulfill its commitments as a key NATO member. Straddling Europe and Asia, Turkey submitted an application to join BRICS several months ago, driven by frustration over slow progress in its long-standing bid to join the European Union.

• The BRICS alliance, originally founded in 2006 by Brazil, Russia, India, and China, with South Africa joining in 2010, has recently expanded significantly. It now includes Iran, Egypt, Ethiopia, and the United Arab Emirates. Saudi Arabia is considering joining, and Azerbaijan formally applied a few weeks ago following President Putin's visit to Baku to meet with President Aliyev. The group's further enlargement may be discussed at the summit in Kazan, Russia, from October 22-24.

• China - Africa Forum: Chinese President Xi Jinping announced a commitment to provide Africa with USD 50 billion in financial support over the next three years, while speaking to leaders from some 50 African nations during the ninth Forum on China-Africa Cooperation Summit. This pledge comes as some African leaders seek to rebalance their economic relationships with China. King Mswati III of Eswatini, Taiwan’s only ally in Africa, did not attend the summit. China will also exempt import tariffs for products from 33 African countries, expand market access, and provide 1 billion yuan in military assistance to train 6,000 military personnel and 1,000 police and law enforcement officers. The visiting delegates from Africa were also expected to negotiate with Beijing on loan terms to address their growing debt burdens.

• The summit also aimed to boost exports of green tech products, such as electric vehicles and solar panels, to Africa—items that face high export tariffs in the West. However, It might be challenging for Xi, as China has yet to fulfill its previous commitment to purchase $300 billion worth of African goods from the 2021 Forum on China-Africa Cooperation Summit.

• Since surpassing the U.S. in 2009, China has been Africa’s largest trading partner. Trade volume has surged from under 100 billion yuan in 2000 to 1.98 trillion yuan in 2023, reflecting an annual growth rate of 17.2%, according to China Customs. China is also Africa's largest creditor, having invested over $180 billion in infrastructure projects—including bridges, rail lines, and hydropower plants—between 2000 and 2023. Last year, Chinese lenders extended $4.61 billion in loans, the highest amount since 2019.

• Ghana: On Thursday, September 5th, the Republic of Ghana launched an exchange offer and consent solicitation for its outstanding Eurobonds totaling approximately USD 13.1 billion. The government invited eligible holders to exchange existing notes maturing in 2023, 2026, 2027, 2029, 2030, 2034, 2035, 2042, 2049, 2051, and 2061 for either or both the Par Menu and Disco Menu options. Ghana’s Eurobond holders' committee endorsed the offer and solicitation, noting that the legal and financial terms align with an agreement in principle reached with Ghana in June. The country is expected to issue the new restructured notes on 9 October.

• We previously noted that the government reached an agreement in principle with the bondholders’ committee in July, which was subsequently approved by the IMF and aligned with the Debt Sustainability Analysis and the official creditors’ committee, meeting the comparability of treatment criteria. Under the “disco” option, a nominal haircut of 37% will apply to all claims, including past due interest (PDIs), with the remaining claims restructured into bonds maturing between 2026 and 2035, offering coupon rates from 0% to 6%. The “par” option, capped at USD 1.6 billion, will apply the same nominal haircut of 37% only to PDIs and have no haircut on pricncipacl amount, with the claims restructured into bonds maturing between 2026 and 2037, featuring coupon rates from 0% to 1.5%.

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