All Kinds of Pivots In EM
August 04, 2022
Read Time 2 MIN
Ending EM Rate Hike Cycles
Consider the following scenario - the end of the tightening cycle in 2022 and potential rate cuts in 2023. Nope, we are not talking about the market expectations for the U.S. Federal Reserve. This is a very likely new monetary policy trajectory in Brazil, following what might have been the final 50bps rate hike yesterday (see chart below). Brazil was hiking aggressively starting from early 2021, but all good (monetary policy) things eventually come to an end. A dovish tweak in yesterday’s statement - evaluating rather than foreseeing the need for a residual policy rate adjustment - suggests that the central bank might take a pause already at the next meeting. The end-result of the central bank’s preemptive policy response and peaking inflation is that Brazil’s real yields adjusted by expected inflation are among the highest in emerging markets (EM) (up to 10 years) relative to economic fundamentals.
EMs Falling Behind The Curve
Brazil’s dovish pivot was completely justified - something that cannot be said about the Czech National Bank, which surprised the market by staying on hold today. Granted, the expected rate hike was small (only 25bps), a big share of inflation is driven by external factors, and there are legitimate concerns about an H2 growth “cliff”. Still, taking a pause when annual inflation is above 17% has all the appearance of a policy mistake.
EM Liftoffs And Wider Policy Agenda
Not all policy pivots in EM are dovish. Central banks in EM Asia are on a hawkish offensive - we keep an eye on India this week, and Thailand on Aug 10 (the market expects a 25bps liftoff, which is long overdue). Some EM rate hikes look dramatic on a surface, but the overall policy framework is so weak that rate hikes by themselves would not make a lot of difference. We are talking, of course, about Argentina, where the central bank recently hiked by 800bps, but yesterday’s stabilization plan looked less impressive. The proposals had a shiny “wrapper” - four pillars and such. But there were no changes in the currency regime and only cosmetic fiscal measures. If these issues are not fixed, the current crisis will deepen further. Stay tuned!
Chart at a Glance: Brazil’s Tightening Cycle - Ready To Exit
Source: Bloomberg LP
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.
August 17, 2022
We continues to get upside growth surprises in EM - the question is whether they are going to last as activity surveys in several major economies are flashing red.
August 16, 2022
Headline inflation appears to be peaking in several EMs. What are the main drivers, and is there any collateral damage elsewhere in the economy?
August 15, 2022
Can the old policy playbooks reverse China’s growth slide and Argentina’s surging inflation?
August 12, 2022
Possibly peaking inflation and additional growth headwinds lead to some policy recalibration in EM. Why China’s credit aggregates looked so weak?