By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
Central banks in Turkey and Brazil delivered bold and larger than expected rate hikes, confirming that monetary policy in EM is decoupling from DM majors.
Never (ever) underestimate Emerging Markets (EM) central banks’ ability to knock it out of the park! Central banks in Turkey and Brazil delivered larger than expected rate hikes – just when needed. Brazil raised its key rate by 75bps to 2.75% after the market close yesterday, and Turkey followed with a 200bps hike (to 19%) this morning.
The Turkish hike pushed the real policy rate deeper into positive territory (headline annual inflation is around 16%) – which is great as it should improve local banks’ ability to attract the lira deposits, reducing the pressure on the currency. In the case of Brazil, the real policy rate is still very negative (annual headline inflation is running above 5%), which explains why the market is clamoring for more frontloaded rate hikes (see chart below).
EM central banks are definitely decoupling from the dovish U.S. Federal Reserve and the European Central Bank (ECB). A big question is what it means in terms of EM assets’ performance going forward. Many EM currencies and bonds were in the red today – spooked by a big spike in US rates – but the Brazilian real and the Turkish lira are outperforming. Note that Turkey’s 10-year government bond yield was among the very few that actually rallied today. The lira is also having a great time (up by 170bps at 9:48am ET, according to Bloomberg LP). This shows that policy credibility pays off. Is that a sign of things to come?
Chart at a Glance: Brazil Rate Expectations – Market Is Clamoring for More Hikes
Source: Bloomberg LP
Originally published by VanEck, 3/18/21
IMPORTANT DEFINITIONS & DISCLOSURES
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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