By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
The global disinflation narrative is firmly in the “how fast” stage, but the progress is uneven, and some EMs might need to err on the cautious side and hike a bit more.
DM Policy Tightening
The global disinflation narrative has shifted from “whether/when” to “how fast,” – but the slowing trend does not mean “smooth sailing.” We get an occasional upside surprise – including the Eurozone’s November revision or today’s U.S. Personal Consumption Expenditure Core Price Index (core PCE). And sometimes inflation peaks remain elusive, downside surprises notwithstanding – like in Japan, where November’s inflation drew extra attention this morning after the central bank’s hawkish yield curve control adjustment a few days ago. These developments explain why the market now expects 44bps of rate hikes in Japan in 2023.
EM Asia Rate Hikes
Emerging Markets (EM) disinflation is on firmer ground – and with lower (tentative) peaks in the case of EM Asia. However, today’s inflation releases in Malaysia and Singapore showed no further progress (in year-on-year terms) in November (contrary to expectations). Further, Malaysia’s core inflation continued to grind higher, challenging the market expectation of the peak policy rate and an extended policy rate pause in 2023. Some sell-side commentators suggested that the central bank might err on the side of caution in January and raise the policy rate one more time – which would be a prudent move, given that the policy rate differential between EM Asia and the U.S. Federal Reserve is very slim now.
Yesterday, Mexico’s bi-weekly inflation print was another illustration of the “bumpy road” price trajectory in EM. However, Brazil reaffirmed its “disinflation poster kid” status this morning, with a nice downside surprise and further moderation in mid-month inflation, which is now below 6% year-on-year (vs 12.2% back in May, see chart below). Easing price pressures mean that Brazil’s real policy rate is among the highest in the world – and this leaves ample room for rate cuts in 2023. Whether or not the central bank would be able to use this policy space is a different question though – due to fiscal concerns. The fact that the incoming administration’s spending waver was approved only for one year is a big plus, but the new cabinet’s lineup signals that we might see more populist policy surprises in the coming months. Stay tuned!
Chart at a Glance: Brazil Disinflation – Nice and Steady
Source: Bloomberg LP.
Originally published by VanEck on 23 December 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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