A Change of Pace

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation

While the market is rapidly re-pricing its expectations for rate hikes in DM, emerging markets continue to hike, but some are getting closer to the end of their tightening cycles.

Rate Hike Expectations In Developed Markets

The expectations for the U.S. Federal Reserve and the ECB are moving really fast – according to Bloomberg LP the market now prices in the steepest annual Fed tightening since 1994 (see chart below), while the ECB’s depo rate is now expected to be 116bps higher in 1 year (compared to just 36bps one month ago). Multiple Fed speakers are now saying that inflation is not going away quickly, and the Bank for International Settlements just published a paper, which argues that “we may be on the cusp of a new inflationary era”. VanEck’s take on inflation can be found here.

Emerging Markets Policy Frontloading

The “change of pace” narrative is dominating emerging markets (EM) as well – but with a twist. The reason is that central banks in EMEA and LATAM started to hike aggressively a while ago, responding to higher inflation. And we continue to see “oversized” rate hikes in EM – including today’s +100bps in Poland – however, there is a view that this frontloading can actually result in lower terminal rates and potentially sharper disinflation/easing 12-18 months from now. EM’s tightening “trailblazers” like Brazil are already slowing the pace of hikes, with the local swap curve pricing in only 120bps for the rest of the year. We will keep an eye on this week’s inflation release in Brazil to see whether this expectation is justified.

China Growth Headwinds

The latest Caixin services PMI strongly suggests that a change of pace might also be required in China – both as regards monetary policy (something along the lines of “blanket” rate cuts) and reducing the regulatory uncertainty. The Caixin non-manufacturing survey – which has a larger share of privately owned companies – was significantly weaker than expected (42.0 vs. 49.7 expected), signaling that the COVID outbreak (and the zero-COVID policies) can be a bigger near-term headwind for growth than previously thought. The State Council admitted that that downward risks are increasing, and that it would dispense additional monetary support “at an appropriate time”, albeit details are still lacking. Stay tuned!

Chart at a Glance: Market Stepped Up Rate Hike Expectations for the Fed

Chart at a Glance: Market Stepped Up Rate Hike Expectations for the Fed

Source: Bloomberg LP

Originally published by VanEck on April 6, 2022.

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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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