Brace for Impact

22 March 2023

Read Time 2 MIN

The Fed might be stealing the limelight today, but the importance of geopolitical factors – like Chinese President Xi’s “change is coming” visit to Russia – should not be underestimated.

Fed Rate Hikes

The focus of the day is the U.S. Federal Reserve (Fed) ’s rate-setting meeting, and the market expectations are very much in line with a Citi report reminding us that the Fed does not always stop hiking, when “something breaks”. The Fed Funds Futures almost fully price in a 25bps increase in the target rate this afternoon, with a 70% probability that it will be followed by another hike in May. However, the market expectations also reflect a perception that growth headwinds could multiply if financial conditions and lending standards tighten in the wake of the banking mini-crisis. This scenario, however, might not necessarily lead to materially lower inflation pressures, which clouds the outlook for long duration trades.

EM Policy Rates

EM watchers keep a close eye on the Fed – and its peers in developed markets (DM)– but the current cycle showed that various EM central banks are no longer joined at the hip with the Fed, and their monetary policy decisions are increasingly driven by local economic and policy developments. Most EMs started hiking earlier and more aggressively than the Fed after the pandemic, and the latest jumps in the market expectations for the Fed’s also had a limited impact on EM. Brazil’s example is very telling. The chart below shows the evolution of Brazil’s implied policy rate trajectory in the past month and a half. The big shifts down reflected the disinflation progress and hopes that the new fiscal framework would be more reasonable than feared. The changes in Brazilian expectations for 2023 between March 8 and March 21 were barely detectable.


The Fed might be stealing the limelight today, but the importance of certain geopolitical developments – like Chinese President Xi’s “change is coming” visit to Russia – should not be underestimated. Our long-standing argument is that new geopolitical alignments can favor many EMs – especially as regards energy re-orientation and commodity prices. A longer-term prospect of EMs playing China against the U.S. is another important angle, which echoes discussions about the rise of the renminbi and the eventual descent of the petro-dollar. The renminbi’s potential role in payments between Russia and countries in Asia, Africa and LATAM even made it into official communiques issued after the China/Russia talks. Stay tuned!

Chart at a Glance: Brazil’s Rate Expectations – U.S. Fed Is A Side-Show For Now

Chart at a Glance: Brazil's Rate Expectations - U.S. Fed Is A Side-Show For Now

Source: Bloomberg LP.


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