EM Inflation Surprises – New Hope | ETF Trends

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

EM inflation surprise index continues to improve. Does it mean EM central banks can finally relax?

EM Price Pressures

The inflation surprise index for emerging markets (EM) keeps improving (see chart below), with Mexico and Chile joining three Asian economies (Indonesia, South Korea, and Thailand) on this week’s downside surprise list. Granted, inflation surprises in Mexico and Chile are too small to justify a pause in the tightening cycles. Further, headline and core inflation in both countries are significantly above their respective targets. This is the reason why the market continues to price in more rate hikes – a +50bps move in Chile next week and +75bps in Mexico in early November. However, if the disinflation trend is confirmed, central banks can safely slow the pace of tightening later on.

LATAM Rate Hikes

Chile and Mexico’s regional peer – Peru – is already in this position. The central bank was perfectly content with a small 25bps hike yesterday. But this is not the end of the cycle. An important reason why Peru will continue tightening for some time is because inflation expectations are still elevated. The fact that they are trending down, however, allows to proceed in small steps. An additional consideration is that Peru’s ex–ante real policy rate (adjusted by expected inflation) is already positive – an indication that the policy stance is getting more restrictive against the backdrop of the weaker growth outlook.

EM Asia Growth and Policy Rates

One question we keep asking ourselves is whether EM Asia would be able to avoid the high inflation “curse” that scarred this year’s economic backdrop in Emerging Europe and LATAM. Asia’s regional inflation wave started later, giving central banks more time to remain accommodative, and the latest inflation releases suggest that the inflation momentum might already be easing just below the previous regional inflation peak in 2012–2013 (which is not the case in either EM Europe or LATAM). Does this mean that Asian central banks are in a better position to deal with the global growth slowdown? We hope to get more insights at the IMF Annual Meetings in Washington DC next week. Stay tuned!

Chart at a Glance: EM Inflation Surprises Trending Lower

Chart at a Glance: EM Inflation Surprises Trending Lower

Source: Bloomberg LP.

Originally published by VanEck on October 7, 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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