EM Doves – Divergent
September 09, 2022
Read Time 2 MIN
Global Tightening Cycle
The hawkish buzz in developed markets (DM) is loud and clear. The U.S. Federal Reserve (Fed) Chairman Jarome Powell talked about the need to fight inflation (“forthrightly, strongly”) in yesterday’s presentation. The Fed Funds Futures are pricing in close to 75bps of the Fed tightening on September 21. Former President of the New York Federal Reserve William Dudley is saying that the Fed rate will exceed 4% in the first half of 2023 (= an extra hike, compared to what is currently priced in). Canada just raised its policy rate by 75bps, and the European Central Bank (ECB) is expected to hike by another 75bps in October. But, the world is not a monolith, and there is a distinct dovish undercurrent in emerging markets (EM) monetary policy space. Reasons vary though.
Growth Concerns in EM
Concerns about a growth cliff dominate in parts of Central Europe (Poland, Czech Republic, Romania). A popular argument is that regional inflation pressures are mostly “imported” and cannot be “fixed” by rate hikes. As a result, Poland slowed the pace of hikes to 25bps, and the Czech National Bank took a surprising pause in August – despite (re)accelerating double-digit inflation. As regards LATAM, there are tentative signs of disinflation, plus the fact that ex-ante real policy rates started to look restrictive after aggressive rate hike frontloading. Peru opted for a smaller 25bps rate hike yesterday. Brazil might pause at the next rate-setting meeting – albeit there were some concerning details in today’s inflation release, which can convince the central bank to deliver one more hike. The diffusion index is still high (around 65%), core inflation is stickier than headline prices, and some price declines reflect fiscal/regulatory measures.
China Policy Support
And there’s China. China tested the water with surprising rate cuts back in August, and today’s below-consensus inflation numbers (both consumer and producer – see chart below) show that domestic demand is still soft and might require additional support. The timing could depend on whether the already approved policy measures are working or not. And the latest credit aggregates might be showing some results – especially in the real estate sector. There was a small sequential increase in long-term household lending (a proxy for mortgages), and a big increase in entrusted loans, which some commentators suggested might reflect bailouts from government funds. Further, corporate lending (including medium and long-term) also showed some improvement. This is still a very early stage – keep an eye on the upcoming 20th Party Congress in October and its updated policy guidance. Stay tuned!
Chart at a Glance: China Inflation – Downside Risks Dominate
Source: Bloomberg LP.
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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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.