EM Hawks – Changing of the Guard
June 08, 2022
Read Time 2 MIN
EMEA hawks are descending, but EM Asia hawks are now firmly in charge, with India going for a larger than expected rate hike and Thailand’s central bank signaling a near-term liftoff.
Slower Pace of Tightening In EMEA
Emerging Markets (EM) Asia’s monetary policy hawks are spreading their wings and getting more confident, but their peers in EMEA are suffering setbacks. And we are not talking about policy outliers such as Russia and Turkey – the latter’s dovish “overdrive” appears to be catching up with the currency, which weakened by more than 200bps vs. U.S. Dollar today (at 9:25am ET, according to Bloomberg LP). Poland delivered the expected 75bps hike today, but President of the Czech Republic Miloš Zeman sounded a bit “Erdogan-ish” in his comments about “other tools to tame inflation”. The Czech National Bank (CNB) is also facing a major board overhaul, with several prominent hawks being replaced by more dovish colleagues. This is the reason why the CNB’s next rate-setting meeting will be closely watched – there is a possibility of a large “goodbye” rate hike from outgoing Governor and his like-minded board members, especially if Czech inflation surprises to the upside this Friday. It’s worth noting that headline inflation in all four Central European countries is now in double digits, after Hungary joined the “club” this morning with an upside surprise (see chart below).
EM Asia Bets on Rate Hikes Frontloading
Going back to EM Asia, hawks are firmly in charge in the Indian central bank – we’ve got a larger than expected 50bps rate hike this morning, which is a nice policy follow-through after the emergency hike in May. “Rate Hikes Frontloading” is the name of the game in India, with at least 125bps more expected in the next six months. Thailand kept the policy rate unchanged today, but it was definitely a hawkish hold. The vote was very close (3 out of 4 members voting for a 25bps hike), and the statement signaled a near-term liftoff, followed by more hikes, because the economy is doing better than expected and the tight labor market is expected to put more pressure on core prices.
Monetary Policy Surprises In LATAM?
Compared to the exciting developments in EMEA and EM Asia, LATAM’s monetary policy landscape looks boring – well, almost. The Chilean central bank exemplifies this steady and orthodox approach, continuing the tightening cycle with the expected 75bps rate hike. This brings the total amount of hikes to 850bps – enough to push the real policy rate based on expected inflation to around 4%, but not enough to turn the inflation tide (headline inflation accelerated to 11.5% year-on-year in May). Elsewhere in LATAM, the consensus sees a smaller 50bps hike in Brazil next week (on the “boring” side as well), but Mexico might surprise with larger policy frontloading (+75bps) at the end of the month if inflation proves higher than expected. Stay tuned!
Chart at a Glance: Central Europe Inflation – Double Digits Reality
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.