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Peaks, Cliffs, and Policy Responses

August 12, 2022

Read Time 2 MIN

Possibly peaking inflation and additional growth headwinds lead to some policy recalibration in EM. Why China’s credit aggregates looked so weak?

EM Inflation Peak

Peaking inflation, concerns about an H2 growth “cliff”, and finding the right policy balance to navigate these issues continue to dominate market discussions. Indeed, emerging markets (EM) inflation surprises are heading south (see chart below), and the latest inflation prints show that inflation might be peaking (or at least plateauing) in several major EMs. Poland’s headline inflation for July was revised a touch higher to 15.6% year-on-year, but it still showed no acceleration vs. June (in annual terms). India’s headline inflation decelerated more than expected (to 6.71% year-on-year) in July. And, of course, Brazil’s disinflation seems quite established at this point.

Slower Pace Of Rate Hikes in EM

In countries with signs that disinflation might be near, central banks’ concerns are gradually shifting towards growth risks, which are mostly to the downside (there are exceptions, of course, such as today’s stronger than expected Q2 GDP print in Malaysia). Some EM hiking “champions” are ready to exit their tightening cycles (Brazil), and several others are slowing the pace of hikes. Yesterday’s dovish hike in Peru is a good example of the latter. The central bank now expects inflation to get back to the target range earlier than previously thought, and the communication specifically referred to global growth headwinds as the reason for a more dovish tone. Mexico delivered a unanimous 75bps rate hike yesterday, but the statement also sounded a bit less hawkish, pointing to smaller rate hikes going forward. We’ll keep an eye on the next quarterly inflation report for the central bank’s more detailed assessment of growth risks.

China Policy Stimulus and Growth Slowdown

In regards to policy calibration in response to slower growth, China’s latest credit aggregates surprised massively to the downside - and the surprise looks even more striking against the backdrop of another cut in the 2022 consensus growth forecast (to 3.8%). Both total social financing and new yuan loans were below their respective seasonal ranges. A “payback” for June’s surge? Possibly. However, there are other considerations: (1) A sharp sequential drop in government bond issuance - the end of the frontloaded issuance quota? (2) A sharp decline in household long-term lending (mortgages) - the mortgage boycott did not help (3) A big sequential decline in corporate lending and bond issuance - the end of the quarterly re-lending window and the fading re-opening effect. Some credit aggregates should recover closer to the end of Q3, but this might be too late for a meaningful growth boost in 2022 - especially if the zero-COVID policy stays in place. Stay tuned!

Chart at a Glance: EM Growth and Inflation Surprises - Change Is Underway*

Chart at a Glance: EM Growth and Inflation Surprises - Change Is Underway*

Source: Bloomberg LP

*Commodity selection index (CSI) is a technical momentum indicator that attempts to identify which commodities are the most suitable for short-term trading.

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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