The hawkish expectations for global rates and high near-term inflation pressures echo the first two words from the famous Olympic motto. Does “Stronger” still apply to the global growth outlook?
It’s less than a month left before the Winter Olympic Games, and the market narrative seems to be fully in line with the famous motto “Citius, Altius, Fortius!” – “Faster, Higher, Stronger!” “Faster” is a good way to describe a more hawkish outlook for policy rates, especially in the U.S. The implied probability of the March lift-off reached 81% this morning (based on the Fed Funds Futures – see chart below), and the market now sees a total of 88bps of hikes in the next 12 months, with a strong possibility of the Federal Reserve balance sheet’s reduction (quantitative tightening, QT). Emerging markets are not done with rate hikes yet. Peru raised its key rate by 50bps yesterday, and the Mexican central bank’s minutes sounded rather hawkish. Argentina also joined the rate-hiking club yesterday (+200bps to 40%), but without a credible fiscal consolidation plan this policy move sends a signal that “The most important thing is not winning [the inflation battle], but taking part” (continuing the Olympic theme).
“Higher” is a suitable allegory for near-term inflation risks. We have a number of upside inflation surprises today – including the Eurozone’s 5% year-on-year all-time high, Chile’s 7.2% annual headline inflation, and Poland’s scary-looking jump to 8.6% year-on-year, which led to official suggestions about VAT (value added tax) cuts. There are signs that inflation might be peaking in parts of EM – check today’s headline print in Mexico for example. Further, a very high base effect should pave the way for disinflation in H2. But the near-term inflation dynamics is will keep EM central banks in a hawkish mode.
“Stronger” is not really a statement, but rather a question mark about this year’s growth dynamics – both in emerging markets and advanced economies, especially if the market expectations for policy normalization prove correct. The 2022 consensus growth forecast for the U.S. was cut below 4%, and growth in EM ex-China is expected to moderate to 4.44%. In EM, all eyes are now on Brazil – it is seen growing by less than 1% this year, in part due to very aggressive policy tightening in 2021. The next batch of China’s domestic activity indicators and credit aggregates (next week) will also be closely watched for signs of sustained improvement and the need for more policy support. Stay tuned!
Chart at a Glance: Market Expects U.S. Fed Liftoff in March
Source: Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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