By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
The Pace of Fed Hikes
The global data flow does not challenge the slowdown narrative, but it also shows that the momentum is very uneven – today’s strong labor market report in the U.S. could not have looked more different from this week’s ISM survey, which sent a much weaker signal. Both releases are, however, consistent with the market view that the U.S. Federal Reserve (Fed) can and should continue raising its policy rate, but at a slower pace (see chart below). At the same time, upside surprises like the strong labor market report raise a question mark as to whether the Fed would indeed have room for around 40bps of rate cuts in H2-2023.
EM Disinflation
The data flow in emerging markets (EM) is also not uniform – especially on the inflation front. The overall trend in EM inflation surprises is down, but it does not mean that we do not get an occasional above-consensus print, like in Peru. Peruvian headline inflation unexpectedly accelerated to 8.45% year-on-year in November, interrupting the nascent disinflation trend and signaling that the underlying price pressures may prove more persistent than previously thought. The year-to-date total return on Peru’s local debt (J.P. Morgan’s GBI-EM Peru U.S. Dollar Unhedged Index1) is still positive, but future performance will depend on the central bank’s ability to navigate the situation credibly (and this includes the expected 25bps rate hike next week). South Korea’s inflation print was the opposite of Peru – a nice downside surprise, which can allow the central bank to pause going forward.
EM Growth Slowdown
As regards upside growth surprises, some (if not most) of them require additional context. For example, Chile’s economic activity was stronger than expected in October, but it was still contracting at an accelerated pace (-1.2% year-on-year). In the same vein, today’s upside surprise in the Czech Republic’s Q3 GDP masked another sequential decline (-0.2% quarter-on-quarter), which might get worse going forward judging by the super-weak November PMI (41.6). There is no question that the central bank will stick to its “on hold” stance under these circumstances. Finally, Brazil’s industrial production growth also beat consensus in October, but the new administration’s policy agenda could have an impact (and not necessarily positive) on the business sentiment – a worrying prospect against the backdrop of a sharp decline in Brazil’s manufacturing PMI (to 44.3). Stay tuned!
Chart at a Glance: Market Sticks to Its Policy Rate Expectations for the Fed
Source: Bloomberg LP
1J.P. Morgan GBI-EM Peru U.S. Dollar Unhedged Index is the Peru subset of the GBI-EM Index, defined below.
Originally published by VanEck on December 2, 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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