By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
The market is not yet in a hurry to price in additional tightening in EM, despite bringing forward rate hikes in Europe and the U.S.
DM Rate Hike Expectations Brought Forward
Most Asian emerging markets (EM) look pretty “boring” these days compared to developed markets (DM) or peers in EMEA/LATAM when it comes to inflation and policy rates. Brazil’s rate-setting meeting will be closely watched this afternoon, especially as regards the central bank’s assessment of the disinflation prospects. In the U.S., the chatter about a 50bps hike in March refuses to go away – despite the “Omicroned” ADP Employment print, in part because the shocking decline (-301K) should be reversed next month. In Europe, the swap curve now prices in the first 10bps rate hike in July (!), and today’s massive upside inflation surprise (5.1% year-on-year vs. 4.4% expected) should keep these expectations alive – at least until the ECB’s meeting tomorrow.
Emerging Market Rate Hikes to Peak Soon?
The question is whether bringing forward the rate expectations in the Eurozone will have meaningful implications for Central Europe, where we will have two rate-setting meetings in the next 6 days. The consensus sees a sizable 75bps hike in the Czech Republic (after 100bps last month), and another 50bps of tightening in Poland would be completely justified given the rising wage pressures (+11.2% year-on-year in December). However, the market is not in a hurry to price in more tightening in the second half of the year. Rate hikes in Poland, Hungary, and the Czech Republic are expected to peak around mid-year, with a possibility of gradual easing later on. We see a very similar pattern in parts of LATAM (Brazil, Chile).
Gradual Liftoff in EM Asia
Going back to EM Asia, the regional rate expectations are largely drama-free – mostly because of drama-free inflation. Indonesia got a small round of applauds today when its annual inflation re-entered the central bank’s target range in January – from the low side that is (see chart below). Tomorrow’s inflation print in the Philippines should confirm that inflation had peaked in Q4. Thailand’s headline inflation is expected to grind higher (to 2.47% year-on-year in January), but it will remain within the target range. Therefore it should not come as a surprise that the market places the beginning of rate hiking cycles in most Asian economies (outside of China and South Korea) in Q2. Will India surprise on a hawkish side on February 8 or follow a “cautious” script? Stay tuned!
Chart at a Glance: EM Asia Inflation – Don’t Worry, Be Happy
Source: Bloomberg LP
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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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