By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
China’s Benign Inflation Backdrop
Today is a big inflation day – and we’ve got a bunch of downside surprises across the globe, starting with the U.S. (both core and headline). What to make out of it? In emerging markets (EM), one big takeaway in China is that the zero-COVID policy continues to freeze domestic activity – just like “ice-nine” from Vonnegut’s Cat’s Cradle. Core inflation moderated to a mere 0.8% year-on-year in July (see chart below), and a major reason why annual headline inflation accelerated to 2.7% was a whopping 25.6% monthly jump in the price of pork. The most obvious implication is that the inflation backdrop gives the central bank (PBoC) plenty to room to stimulate the economy, except that the central bank has not been too keen on opening monetary spigots (at least for now). We keep an eye on China’s July credit aggregates – out later this week – for more color and insights.
Thailand’s Policy Rate Liftoff
Thailand’s inflation is running 3+ standard deviations higher than the multi-year trend, but the latest inflation print was softer than expected. This is why there was a sigh of relief that the central bank finally started its tightening cycle today. There were no hawkish surprises (a modest +25bps move), and the central bank indicated that it will proceed gradually due to growth concerns (we talked about a potential H2 growth “cliff” on several occasions), but at least the policy normalization process is now underway. The baht was preparing thoroughly for the inaugural hike – appreciating against the U.S. dollar since the end of July.
Czech Republic Policy Rate Pause
The most intriguing inflation print of the day comes from the Czech Republic. Headline inflation accelerated further to 17.5% year-on-year in July, but it was a downside surprise. Importantly, the print was below the central bank’s projection for the month. So, does it mean that the interest rate pause will be extended? This cannot be excluded, given the dovish bias of the new board members. In addition, the central bank has been relying heavily on FX interventions to cap depreciation of the koruna and reduce FX-inflation passthrough. The Czech National Bank’s international reserves are large enough to support sizable currency interventions (USD7.4B in June, according to Bloomberg LP) for a little longer. Stay tuned!
Chart at a Glance: China Inflation – No Sign of Core Pressures
Source: Bloomberg LP
Originally published by VanEck on August 10, 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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