Growth, Prices, Rates – Slower Pace?
November 28, 2022
Read Time 2 MIN
Fed Policy Rate Path
Recession concerns and nascent disinflation explain why the market is comfortable pricing in smaller rate hikes and even some rate cuts going forward. The Fed Funds Futures show a 50bps U.S. Federal Reserve (Fed) hike in December, and a total of 38bps of rate cuts in the second half of 2023. It would be interesting to see whether Fed Chairman Powell’s presentation on Wednesday will change these expectations. As regards emerging markets (EM), Chile leads the “easing” pack with around 545bps of rate cuts priced in for the next year. The outlook for other EMs is much less aggressive, but even disinflation laggards like Mexico are expected to make room for rate cuts (to the tune of 90bps) in H2-2023.
China Reopening
The latest China headlines – the anti-lockdown protests and a spike in the number of new COVID cases – led to confusion about the pace of re-opening, weighing on near-term growth expectations. The consensus thinks that China’s domestic activity gauges will show further deterioration in November. This would explain Friday’s pre-emptive cut in the reserve requirements for banks (albeit many observers are skeptical that the move would make a big difference for funding costs, given that the cut was very small – only 25bps). One possible outcome is that the protests might lead to more policy stimulus to compensate for the re-opening setbacks. Market participants reacted positively to reports of further support for real estate developers, including low interest loans to buy developers’ onshore bonds.
Brazil Fiscal Debates
Brazil is among very few countries where the market continues to price in additional rate hikes – after pricing in a decent number of rate cuts going into the presidential elections. The local swap curve added at least one more hike for the next six months (a total of 101bps). This might look excessive/too hawkish, but these expectations reflect concerns about the new administration’s spending plans for the next four years, which can reverse the post-pandemic decline in Brazil’s debt-to-GDP ratio (see chart below). Fiscal/policy continuity concerns had a major impact on Brazil’s local debt performance in November (the only negative total return among all GBI-EM constituents). The damage can be undone, but it would require more certainty and less controversy about the fiscal outlook. Stay tuned!
Chart at a Glance: Brazil Debt/GDP Ratio – Lower But Still Very High
Source: Bloomberg LP.
BZDPGDT% Index – Brazil General Government Gross Debt Percentage. Represents Brazil’s debt-to-GDP ratio.
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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.