By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
Summary
Rising U.S. inflation and the ECB’s hawkish pivot raised questions about implications for EM central banks, which already frontloaded a lot of hikes but face new inflation risks.
Policy Normalization In U.S., Europe
Things took a decisively hawkish turn this morning – especially in Europe. The European Central Bank (ECB) surprised the market by announcing an earlier winding down of its bond purchase program and dropping a reference to “lower than currently” rates. To be fair, the statement was sufficiently open-ended, but the European yield curve bear-flattened (short rates rose more than long ones), while the swap curve brought forward the ECB’s first rate hike to July and significantly “beefed up” the expectations for overall policy tightening in 2022. What does the ECB’s hawkish pivot mean for Central European economies?
Emerging Europe Inflation, Rate Expectations
Well, Central European central banks had already frontloaded a lot of rate hikes – including yesterday’s hawkish surprise in Poland (+75bps) – but the latest releases show that (a) inflation pressures persist, and (b) they are broad-based. Hungary’s inflation accelerated more than expected in February (8.3% year-on-year), and Czech inflation surged to whopping 11.1% year-on-year, beating expectations by a wide margin. We were, therefore, a bit surprised to see the 3-month market expectations for these two countries easing this morning compared to several days ago. With near-term inflation risks firmly to the upside and Central European headline inflation looking like LATAM’s, the widening gap between the expected terminal policy rates in the two regions (see chart below) is getting increasingly questioned.
LATAM Is Watching U.S. Fed
Talking about LATAM, the outlook for the U.S. Federal Reserve is more important. Today’s U.S. inflation print looked scary(7.9% year-on-year), but it was in line with consensus, which explains why the expectations for the Fed’s March rate hike implied by Fed Fund Futures did not move much. The market, however, is now back to pricing more Fed hikes in 2022 (6-7). And this keeps LATAM central banks on their toes. Inflation expectations in Chile continued to deteriorate. Colombia’s Board member Roberto Steiner sounded very hawkish yesterday. In Brazil, the market is pushing for two 100bps rate hikes in a row (March and May). Mexico’s central bank board, however, looks more divided. Will the new governor stick to her hawkish message later this month? Stay tuned!
Chart at a Glance: Do Emerging Markets Policy Rate Expectations Adequately Reflect Reality?
Source: VanEck Research; Bloomberg LP
Originally published by VanEck on March 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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