Weaker Growth Begets Weaker Performance?

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

A growth hiccup in the U.S. raised additional concerns about EM performance going forward.

U.S. Growth Outlook and EM Assets

weaker than expected Q1 real GDP growth in the U.S. (-1.4% quarter-on-quarter annualized), raised a bunch of questions about the market’s very hawkish expectations of the U.S. Federal Reserve (Fed). It also raised more concerns about emerging markets (EM) assets’ ability to outperform during the current hiking cycle in the U.S. Both EM sovereign and local debt did quite well during the past two cycles – but this was happening against the backdrop of fewer growth headwinds, which was beneficial for EM exports and external balances (=lower risks) and allowed returns from spread compression to offset losses from higher “risk free” rates. The recession risks in the U.S. are still not particularly elevated, but they are rising (see chart below), creating a tougher backdrop for EM economies, albeit not necessarily for EM duration.

China FX Depreciation

Another big global driver is the Chinese renminbi’s weakness. The currency dropped by another 87bps against the U.S. dollar today (according to Bloomberg LP, as of 10:12am ET), pulling several EM currencies down with it (due to high correlation). The pace of the renminbi’s depreciation might be too fast for China’s central bank – it tried some “remedial” measures to slow it down a few days ago, and if pressures continue to persist, we expect them to do more going forward. We also expect to hear more about China’s ambitious infrastructure investment push (specifically, about details), which aims to minimize the cyclical downturn and meet the official growth target.

EM Interest Rate Hikes

Growth concerns notwithstanding, EM central banks continue to tighten as inflation shows no signs of abating (yet). Hungary raised its 1-week deposit rate by 30bps earlier today, and Poland’s central bank indicated that another big rate hike (100bps) is in the making. Is the central bank positioning for a sizable upside inflation surprise tomorrow (in excess of 11.4% year-on-year)? Stay tuned!

Chart at a Glance: Recession Probability – Rising But Not Too Elevated

Chart at a Glance: Recession Probability - Rising But Not Too Elevated

Source: Bloomberg LP

Originally published by VanEck on April 28, 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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