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  • Emerging Markets Debt Daily

    EM Rates – Foot on Accelerator?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 08, 2021
     

    The latest inflation releases in EM agree with the policy divergence story. China government bonds rallied after the State Council suggested to lower the reserve requirements for banks.

    We had a big inflation data dump in Emerging Markets (EM) in the past two days, and the releases give more credence to the policy divergence story. Big upside inflation surprises in Russia and Hungary suggest that central banks might need to frontload more rate hikes. Brazil’s inflation also continued to climb higher in June (to scary-looking 8.35% year-on-year), supporting the market expectation of additional 95bps tightening in August. There are some borderline cases, though. And Mexico is one of them. The central bank surprised with a small rate hike in June, but the decision was not unanimous. So, today’s downside inflation surprise can be a good excuse to take a pause and see what happens next on the data front.

    Varying inflation trajectories is only one part of the EM policy divergence story. The pace of vaccinations and its impact on the near-term economic outlook is another important component. Low vaccination rates in Asia imply that authorities would need to rely on movement restrictions to control outbreaks, and this means that rate hikes are out of the question for now. Today’s decision by the central bank of Malaysia to keep its policy rate unchanged is one such example.

    Another country where the inflation release will be closely watched this evening is China. The release will come amidst renewed concerns about the global reflation story and after the State Council suggested to lower the reserve requirements for banks (RRR), which led to a very nice rally in China’s government bonds (CGBs, see chart below). We have one nagging question though - what will happen if the RRR cut does not materialize (there were such precedents in the past) or it will be super-targeted? CGBs’ valuations had been getting more stretched lately, and the overnight rally makes them look even more expensive relative to the macroeconomic fundamentals. Stay tuned!

    Chart at a Glance: China Government Bonds Yields Dropped on RRR Cut Suggestion

    Chart at a Glance: China Government Bonds Yields Dropped on RRR Cut Suggestion

    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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