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  • Emerging Markets Debt Daily

    EM Rates – Making Sense of Pivots

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 14, 2021

    The hawkish narrative is still strong in parts of EM, but there are some dovish pivots as well – the release of China’s Q2 GDP later today will signal whether we should expect more. 

    The U.S. Federal Reserve (Fed) and the European Central Bank (ECB) are still clinging to the dark dovish side, but the hawkish rebellion in developed markets (DM) is growing, with New Zealand being the newest dissenter. Emerging markets (EM) did quite a bit of tightening in the past months – our estimates show that the average policy rate in EM rose from 3.75% in September 2020 to 4.40% now – and several central banks are set to tighten even more. Hungary, Czech Republic, Russia and Brazil are at the forefront. Chile is widely expected to deliver its “inaugural” 25bps hike later today.

    So, things are moving in EM, but there have been some changes lately, starting with China’s “blanket” cut in the reserve requirements for banks. Is China shifting from general policy normalization to what one sell-side analyst described as “targeted tightening?" The release of Q2 GDP later today will provide additional insights on the domestic activity side. Equally important are financial stability considerations, as China is attempting to reduce moral hazards and allow more corporate defaults. Moving to EMEA, Turkey is a dovish “wannabe,” but the central bank had enough presence of mind to keep rates on hold this morning, since inflation is still very high. 

    What does all this means from the market perspective – especially against the backdrop of changing U.S. Treasury yields? Well, we often say that “EM is not a monolith,” and in this particular case we can tell at least three different stories (see chart below). Local rates in EMEA moved higher in early 2021, but have since stabilized at levels well below the pre-COVID averages (dotted lines on the chart). Asian rates also edged up during February’s mini-tantrum, but they are trending down now - also below the pre-COVID average. The LATAM story is very different. Local yields (we used the GBI-EM LATAM yield to maturity to measure the regional average) are going through the roof, rapidly converging to the pre-COVID average due to concerns about a shift to populism. So, stay tuned and choose wisely!

    Charts at a Glance: There Is No Single UST-EM Rates Story!

    Charts at a Glance: There Is No Single UST-EM Rates Story!

    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.

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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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