Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
EM Central Banks On Hold
It could have been the shortest emerging markets (EM) daily blog ever. Why are various EM central banks increasingly staying on hold, despite the rising peak rate expectations for the U.S. Federal Reserve and the ECB? Just check the chart below. The End. But, of course, we are not that laconic, so let’s have a closer look. A big takeaway from today’s chart is that EM’s aggressive and timely policy response created an impressive policy cushion – a fundamental “positive” for EM FX, including carry trades (especially against the backdrop of the improving growth outlook). So, even though the U.S. Dollar is up so far this year, several major EM currencies are up (a lot) against the U.S. Dollar. And this creates room for differentiation in the EM space.
EM Disinflation Progress
EM’s disinflation progress is the main driving force here. The high-frequency dataflow can be “jumpy”, but this week’s releases pointed in the right direction – including today’s downside inflation surprise in Mexico. The best part of the release – from the central bank’s point of view in particular – was further moderation in core inflation. The bi-weekly core inflation print looked especially encouraging, easing from 8.38% year-on-year to 8.21%. We don’t think that the Mexican central bank is done hiking yet, but a pause is definitely within reach now. Since we are talking about EM disinflation, we ought to mention China’s surprisingly weak February prints (1% year-on-year vs. 1.9% expected). Even though it might be tempting to interpret them solely as a sign of weak domestic demand, there were several factors – such as seasonality and pork prices (3.8% year-on-year vs. nearly 52% back in October) – that could have led to February’s distortions.
EM External Balances
What else can influence EM’s doves? Well, fiscal consolidation is key, especially in big index names like Brazil. As you can see on the chart below, Brazil’s room for rate cuts is massive in theory – and could increase further if tomorrow’s inflation print meets expectations – but the market needs reassurance about the government’s spending plans and tax reform. We’ll also keep an eye on external balances, as wider current account gaps can increase pressure on FX (and hence on inflation). South Africa’s current account deficit widened more than expected in Q4 (2.6% of GDP), and even though the size is not critical yet, further deterioration might require more action on the central bank’s part. Stay tuned!
Chart at a Glance: EM High Real Rates Create Room For Eventual Rate Cuts
Source: VanEck Research; Bloomberg LP.
Originally published 09 March 2023.
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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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