Emerging Markets Debt Daily
Hawkish Surprises Keep ComingNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 22, 2021
Mexico’s inflation keeps surprising to the upside, supporting the market expectation of more rate hikes in the next 3 months. Other EMs are still expected to normalize their policies, but not yet due to headwinds from low vaccination rates.
This means that some emerging markets (EM) central banks will keep hiking. Some will do it unexpectedly – similar to Ukraine’s 50bps rate increase to 8% earlier today. Some will be telegraphing it in advance – like Russia, Brazil, and now Mexico. You might recall that the Mexican central bank tightened by 25bps in June, following a string of upside inflation surprises. Well, Mexico’s core and headline bi-weekly inflation once again beat the consensus – and staying above the target (2-4%, see chart below) – sending a signal that more tightening will be required in the coming months. How soon? The consensus is still divided whether the central bank will act in August (on 18.6bps is currently priced in) or in the fall (the market expectation for the next 3 months is 34.6bps). Mexico’s local rates ended up higher in the anticipation of more policy adjustment.
South Africa’s headline inflation behaves much better than Mexico’s prices these days, but core inflation is grinding higher (and a tad faster than expected), which is why the market believes the hiking cycle will start in 3-6 months. Reports that Pfizer and BioNTech just signed an agreement to manufacture the mRNA vaccine in Cape Town suggest that the growth outlook should improve over the same time horizon. But today, South Africa’s central bank (SARB) stayed on hold, providing additional support for the economy that was just hit by deadly riots (in addition to the third wave of the virus).
The pro-growth stance was on full display in Indonesia, where the central bank also stayed on hold due to concerns about the low vaccination rates and their impact on the near-term GDP trajectory. So, what we are seeing in EM these days is that different outcomes for growth/inflation lead to different outcomes for central bank policies. What is encouraging is that hawkish surprises are dealt with in a “grown-up” manner (rate hikes), while countries that require more policy support are not pushed to hike at any cost (as past orthodox policies weakened the link between currencies and inflation).
Charts at a Glance: Mexico Inflation – No Respite
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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