Emerging markets (EM) debt experienced a minor rally in May, mostly driven by EM local currency assets as the macro backdrop became somewhat more favourable for some commodity-linked EM economies. Recession concerns moved centre stage and heightened inflation fears subsided to a certain extent, resulting in stabilisation of core yields. However, those recession worries weighed on EM hard currency debt and credit spreads. The COVID situation in China improved with lockdown restrictions being relaxed in Shanghai as the national daily cases count fell below 500; however, there were small outbreaks in pockets of Beijing and Tianjin. EM foreign exchange (FX) proved a bright spot in the month and recorded positive returns amid China’s improving COVID situation and surging commodity prices. Meanwhile, high inflation, mostly due to elevated food and oil prices, continues to keep EM central banks in hawkish mode. US CPI inflation eased a little with the headline annual rate of 8.3% in April ticking down from 8.5% in March. In response to elevated inflation levels, the US Federal Reserve raised the federal funds rates by 50 basis points (bps) in its May meeting and said it will begin balance sheet normalisation in June. The Fed also stated that 75 bps hikes are not being actively considered, leading to a stabilisation in US Treasury core yields. The US dollar depreciated against most EM currencies in the month as the demand for ‘safe haven’ assets moderated. Over the course of May 2022, hard currency outflows were -$4.2bn, while local currency outflows amounted to -$11.1b (Source: JP Morgan).