Global Rates – No Pause For You? | ETF Trends

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

DM hawks are back, but the range is policy signals in EM is much wider, with more central banks contemplating an exit from their tightening cycles.

Global Tightening Cycles

Developed markets (DM) doves are backing off for now, following yesterday’s 75bps hike by the U.S. Federal Reserve (Fed) and Chairman Powell’s “I am the boss” press conference, which scared the daylights out of many risky assets. The Fed Funds Futures effectively added one more 25bps rate hike in 2023, bringing the expected terminal rate to 5.16%. The European Central Bank (ECB) terminal rate expectations moved above 3%. Several ECB speakers said today that hikes should not be affected by political noise and that the policy rate should rise much higher.

EM Asia Inflation Pressures

Against this backdrop, today’s off-cycle central bank meeting in India raised concerns that there will be another emergency rate hike there. But it turned out that the central bank simply wanted (was asked?) to explain to the government why it missed the inflation target for three quarters in a row. A larger rate hike, however, seems imminent in the Philippines. The central bank signaled once again that it might raise its policy rate by 75bps on November 17 – moving in step with the Fed – due to inflation concerns (the October print is out this evening). Unlike the Philippines, central banks in Indonesia and Malaysia might have more policy room for the dovish pivot. The Bank Indonesia pointed out that the second round of inflationary effects was not as strong as initially feared. The central bank of Malaysia stated that it was not on a “pre-set course” after today’s expected 25bps rate hike.

EM Peak Rates

The “data dependent” argument was also made by the governor of the Peruvian central bank, inviting suggestions that it might stay on hold already next week, joining Brazil and (maybe) Chile. While LATAM is contemplating exits from the tightening cycles, most of EMEA is already there (see chart below). The region now has only two active “hikers” – South Africa and Hungary (shadow hikes) – and today’s “on hold” decision by the Czech national bank confirmed the status quo. The next important milestone for the region is Poland’s rate-setting meeting. The central bank surprised the markets by keeping the policy rate unchanged in September. Still, inflation accelerated more than expected last month, and the market continues to price in more hikes on a 12-month horizon. Stay tuned!

Chart at a Glance: EMEA Doves Come in Droves

Chart at a Glance: EMEA Doves Come in Droves

Source: VanEck Research; Bloomberg LP

*Hungary’s official policy rate is on hold, but there is massive shadow tightening

**Romania hiked, but indicated that this is likely to be the last hike

Originally published by VanEck on November 3, 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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