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  • Emerging Markets Debt Daily

    Central Europe Rate Expectations in Flux

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    January 18, 2019

    There were big moves in market expectations for Central European policy rates. Russia’s external balance is very strong, but implications for the currency will be limited.   

    Market expectations for policy rates in Central Europe continue to diverge
    . Today’s much weaker than expected industrial output print in Poland (a mere 2.8% year-on-year in December) should solidify the consensus view that the central bank will remain on hold for most of the next two years (only 17bps of tightening are currently in the price). By contrast, Hungary’s monetary authorities (NBH) sound increasingly hawkish, as their favorite measure of core inflation edges closer to 3%. Earlier this week, Deputy Governor Marton Nagy indicated that the NBH may hike once the 3% target is hit. As a result, rate expectations jumped abruptly, and as of this morning the market priced in nearly four full hikes in Hungary in one year.

    Russia’s external balance looks very strong. The above-consensus November trade surplus (USD19B) came on the heels of yesterday’s big upside surprise in Q4 current account surplus (USD38.8B, see chart below). However, the currency’s upside may be limited. One reason is that the Ministry of Finance restarted its currency purchases today. Another reason is geopolitics: The U.S. House of Representative’s vote yesterday (however symbolic) to keep sanctions against companies owned by oligarch Oleg Deripaska is a sign that tensions are running high.

    The disappointing University of Michigan (UMich) Consumer Sentiment Indexin the U.S. had zero implications for the U.S. dollar this morning. Small upside surprises in December’s industrial and manufacturing production for the U.S. may have helped in the early trade. However, a big drop in the UMich consumer expectations (to the levels last seen in late-2016) is concerning and is likely to reinforce the narrative about the disappearing U.S. growth advantage.

    Chart at a Glance

    Central Europe Rate Expectations in Flux

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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