By Natalia Gurushina
Chief Economist, Emerging Markets

Fixed Income Strategy

China’s policy stimulus started to show up in credit aggregates – one less growth headwind? EM inflation horror stories support the market expectation of additional rate hikes.

The “higher for longer?” question applies to several aspects of the emerging markets (EM) economic narrative – starting with China’s credit growth rebound. The sequential rebound was on the soft side (i.e. below consensus), but it can be seen in all major categories – government and corporate bonds, household lending (including long-term credit – a proxy for mortgages), and corporate lending (including long- and medium-term). Authorities stepped up policy support and rolled back some property restrictions in the past weeks, and it started to show in credit aggregates. Some colleagues on the sell-side think that China’s credit impulse might become positive again in the coming months – we’ll see how this plays out (China has been pretty cautious with financial spigots during the COVID downturn), but today’s release shows that some growth headwinds might indeed be easing.

A more familiar interpretation of our headline question has to do with EM inflation – and we have plenty of horror stories to tell. More and more countries in EMEA and LATAM are reporting inflation in high single digits. Russia’s annual headline inflation jumped to 8.4% and core inflation to 8.71% in November. Mexico released its inflation stats today, and, lo and behold, we’ve got a barrage of above-consensus numbers, including 7.7% year-on-year bi-weekly headline inflation and 5.8% year-on-year core inflation. Just to put things into perspective, Russia’s inflation target is 4% and Mexico’s is 2-4%.

And this brings us to the next question – are EM central banks going to step up policy tightening, past rate hikes notwithstanding (see chart below)? Brazil’s central bank shows no signs of slowing – it delivered a 150bps hike yesterday and telegraphed another one at the next rate-setting meeting. The consensus thinks that the central bank of Russia will go for 100bps on December 17 after the latest inflation surprise – up from 75bps in October and 25bps in September. Peru is expected to maintain the same pace today (50bps) – same as Mexico (25bps next week). The outlook for Peru might be justified by the fact that inflation eased a bit in November – the opposite of Mexico. Will Mexico’s outgoing central bank governor finish his term with a hawkish surprise, or stick to the “measured” script? Stay tuned!

Chart at a Glance: EM Rates Hikes – Peaking or More to Go?

Chart at a Glance: EM Rates Hikes – Peaking or More to Go?

Source: VanEck Research; Bloomberg LP

Note: Regional averages are calculated using PPP GDP weights. The December hikes are month-to-date, with more in the pipeline.

Originally published by VanEck on December 9, 2021.

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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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