EM Inflation – Third Wave
July 05, 2022
Read Time 2 MIN
Regional Inflation Pressures in EM
The inflation outlook in emerging markets (EM) Asia is no longer benign. Headline price pressures are getting stronger, and today’s upside inflation surprises in Thailand (7.66% year-on-year), South Korea (6%), and the Philippines (6.1%) show why it is appropriate to talk about the third regional inflation wave in EM (after LATAM and EMEA - see chart below). There is an argument that slower-moving core inflation leaves room for more gradual rate hikes, but it is becoming increasingly clear that policy inaction would be a wrong response. Malaysia is now expected to hike again tomorrow (+25bps), and the Korean central bank (BOK) is likely to deliver another hike in the middle of the month. Indonesia’s rate-setting meeting is about a week away, and it will be closely watched because inflation said “goodbye” to the official target range in June. Thailand’s central bank (BOT) is scheduled to meet only in August – and the market is now clamoring for 52bps of tightening in the next 3 months and a total of 124bps until the end of the year.
Less Confidence in DM Rate Hikes
This change in EM Asia is happening as the market continues to price out rate hikes in the U.S. and the Eurozone – currently at a faster pace in the latter due to renewed concerns about the impact of higher gas prices (and potentially energy rationing) on European growth. The U.S. Dollar is doing better in relative terms against the euro in this environment, with the EUR/USD currency cross edging closer to parity. The stronger U.S. Dollar, however, is not good news for emerging markets – especially as regards the growth outlook and capital inflows.
EM “Rotten Apples”
The U.S. Dollar’s strength and expectations of more rate hikes in EM (even if at a slower pace in countries which frontloaded aggressively) draws closer attention to two major inflation outliers – Turkey (nearing 80% year-on-year) and Argentina (crossed 60% year-on-year in June). Turkey refuses to hike (the policy rate is frozen at 14%), and this puts a lot of pressure on the currency, which was trading back above 17.0/U.S. Dollar despite another round of “out-of-the-box” measures to stabilize it. Argentina is hiking, but the appointment of Silvina Batakis as new Minister of Economy added to concerns about the fiscal outlook (despite the already softened IMF targets) and debt sustainability, spooking the market big time this morning. Stay tuned!
Chart at a Glance: EM Asia Inflation Pressures Are Catching Up with EMEA and LATAM
Source: VanEck Research; 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.