Policy Tightening – Topping Up | ETF Trends

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Disinflation creates a lot of room for rate cuts, but potentially from higher peak rates and at a later date.

Higher Peak Rates

Bank of Japan’s hawkish turn is an important element of the global policy chatter – given potential implications for Investment Grade bonds in developed markets (DM) and emerging markets (EM) – but Sweden’s central bank stole the monetary policy limelight this morning with a hawkish QT tweak (in addition to a 50bps rate hike). Sweden’s move resonates with a storyline that global central banks might tighten more and start easing later than currently priced in. The recent comments from the governor of the Colombian central bank are quite instructive in this regard. Governor Villar said that policy rates in the region should remain “relatively restrictive” for “an important amount of time” to bring inflation back to target and anchor expectations.

Inflation Pressures

One reason for caution is that – with food and energy prices normalizing – the remaining inflation pressures are increasingly considered a locally-driven phenomenon. This is the view, for example, of some board members of Mexico’s central bank, which is meeting later this afternoon (the consensus expects a 25bps rate hike following an upside inflation surprise – see chart below). The Peruvian central bank is also expected to extend the hiking cycle today (+25bps) – we would like to know how a bill on another round of private pension withdrawals fits into the equation, given its potential to boost domestic demand.

Policy Easing

The situation is not completely hopeless for doves – provided disinflation does not stall. For example, the Romanian central bank’s new assessment is that the disinflation rate might be faster than expected in H2-2023/H1-2024 (a side note – the Romanian central bank has been quite hawkish lately, so it is not Poland’s “perpetual doves” situation). Today’s move in the market expectations for Brazil’s policy rate (after a small downside inflation surprise) shows that successful disinflation creates a nice potential for rate cuts (especially when real rates are very high). However, Brazil’s policy space might be constrained by the new administration’s attacks on the central bank’s independence and attempts to change the inflation target. Stay tuned!

Chart at a Glance: Mexico’s Disinflation – A Bumpy Ride

Chart at a Glance: Mexico's Disinflation - A Bumpy Ride

Source: Bloomberg LP.

Originally published 9 February 2023. 

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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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