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

Summary

EMFX took the U.S. red hot inflation print in stride. China’s credit numbers show that some of the past easing started to filter through. 

U.S. Inflation and Policy Rate Expectation

What a day! Higher than expected China credit numbers and a dovish surprise in India were followed by a red hot inflation print in the U.S., which boosted the market expectations for the U.S. Federal Reserve’s (Fed’s) March rate hike to 39bps (despite all the talks about inflation’s inflection point). Emerging markets (EM) local rates jumped higher in sympathy with U.S. Treasury yields. EM FX went through a couple of “panic attacks” – especially EMEA FX – but ultimately managed to shake off concerns about higher U.S. rates (which was impressive).

China Policy Easing

So, with the Fed’s outlook getting more and more interesting, let’s talk about EM’s doves first. China’s headline credit numbers for January suggest that authorities finally started to deliver on their promise to provide more support for the economy – both total social financing and new yuan loans beat expectations, and the M21 money supply growth accelerated to 9.8% year-on-year. The reality check was a bit more sobering. Many sequential increases reflected seasonal patterns, and both household lending and a proxy for household mortgages were significantly lower than in January 2021. We should also take into account the impact of the Chinese New Year on January’s aggregates – subsequent credit numbers should be more reflective of the actual state of affairs. Still, I think it is fair to conclude that the past easing policies are filtering through, and this should reduce downside risks for China’s 2022 growth.

Rate Hikes Frontloading in LATAM

Will the afternoon’s rate-setting meetings in LATAM reaffirm EM’s hawkish credentials? The answer should be “yes” – central banks in both Mexico and Peru are expected to raise their respective rates by 50bps. Mexico’s meeting will be special – the first one for the central bank’s new Governor Victoria Rodriguez Ceja, and the market will be paying special attention to how she is going to tackle the country’s high inflation/low growth problem. Stay tuned!

Charts at a Glance: China Credit Aggregates – Upside Surprise

Charts at a Glance: China Credit Aggregates – Upside Surprise

Source: Bloomberg LP

1M2 is a measure of the money supply that includes cash, checking deposits and easily-convertible near money.


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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