Natalia Gurshina
Chief Economist, Emerging Markets Fixed Income
EM Central Bank on hold
This just might be the shortest emerging market (EM) daily blog ever. why are Various EM central banks increasingly catching up despite rising peak rate expectations for the US Federal Reserve and ECB? Just look at the chart below. End. But, of course, we’re not that concise, so let’s take a closer look. A major takeaway from today’s charts is that EM’s aggressive and timely policy response created an impressive policy cushion – a fundamental “positive” for EM FX including carry trades (especially against the backdrop of improving growth outlook). against). Therefore, even though the US Dollar is up so far this year, many major EM currencies are (a lot) up against the US Dollar. And this makes room for differentiation in the EM space.
EM deflation progress
The deflationary progression of the EM is the main driving force here, High-frequency data flows may be “bouncing,” but this week’s releases point in the right direction — including today’s fall inflation surprise in Mexico. The best part of the release – especially from the central bank’s perspective – was the further softening in core inflation. The bi-weekly core inflation print looked particularly encouraging, declining to 8.21% from 8.38% year-on-year. We don’t think the Mexican central bank is done hiking just yet, but a halt is certainly within reach now. Since we’re talking about EM deflation, we should mention China’s surprisingly weak February print (1% year-on-year versus 1.9% expected). Even though it may be tempting to interpret them solely as a sign of weak domestic demand, there were a number of factors – such as seasonality and pork prices (up 3.8% year-on-year versus nearly 52% in October) – that May have been the cause of February’s distortions.
EM External Balance
What else can affect EM’s pigeons? Well, fiscal consolidation is important, especially in big index names like Brazil. As you can see on the chart below, the headroom for a rate cut in Brazil is huge in theory – and could go higher if tomorrow’s inflation plays up to expectations – but the market is worried about the government’s spending plans. And assurances are needed about tax reforms. We will also keep an eye on external balances, as a widening current account gap could exert pressure on FX (and hence on inflation). South Africa’s current account deficit widened more than expected in Q4 (2.6% of GDP), and even though the size is not yet significant, a further decline could require more action from the central bank. stay tuned!
Chart at a glance: EM higher real rates make room for final rate cut
Source: VanEck Research; Bloomberg LP
Originally published 09 March 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 of Supply Management PMI: ISM releases an index based on surveys of over 400 purchasing and supply managers; in both 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 goods; PPI – Producer Price Index: A family of indexes that measure the average change in selling prices received by domestic producers of goods and services over time; pce inflation – Personal Consumption Expenditure Price Index: A measure of US inflation, tracking changes in the 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 index and equity portfolio analysis tools; VIX – CBOE Volatility Index: An index created by the Chicago Board Options Exchange (CBOE) that reflects the market’s expected 30-day volatility. It is constructed using implied volatility on S&P 500 Index options. GBI-EM – JPMorgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmark that tracks local currency bonds issued by emerging market governments; embi JPMorgan’s Emerging Market Bond Index: JPMorgan’s index of dollar-denominated sovereign bonds issued by select emerging market countries; EMBIG – JPMorgan’s Emerging Market Bond Index Global: Tracks the total return for external debt instruments traded in emerging markets.
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