Disinflation Narrative - Very Much Intact
January 12, 2023
Read Time 2 MIN
Global Disinflation
The U.S. inflation print dominated the newswires this morning, and perhaps the most surprising aspect of the release was the absence of any surprises (albeit many commentators noted that inflation ex-shelter was lower than expected, and that this is a dovish signal). The U.S. disinflation story remains intact, and the disinflation process in emerging markets (EM) looks just as established, despite occasional bumps on the road and some notable exceptions (Hungary, Colombia). India’s inflation was fully in line with this argument – it eased more than expected in December (to 5.72% year-on-year) and stayed within the official target band of 2-6%. Regarding the latter point, India is still in a minority, and inflation in most EMs is well above the respective targets. However, the consensus forecasts are gradually grinding down, and some countries might hit the targets sooner than initially thought (the consensus has been quite excited about Hungary lately, placing it ahead of presumably more “orthodox” regional peers).
China Reopening
China’s inflation releases are still flying under the radar – nobody seem to care about them because the reopening caused a surge in infections, temporarily weighing on domestic activity. However, we should be paying attention for a number of reasons. Authorities surprised the market with the faster and more comprehensive removal of the COVID restrictions, and there is huge domestic pent-up demand for goods and services. So, even though China’s inflation looks benign now (mere 1.8% year-on-year in December), it should accelerate in the coming months. This scenario should lead to higher rates and the improvement of the interest rate differential with the U.S. in favor of China, strengthening the fundamental support for the renminbi, which is an anchor for a number of EM currencies.
EM Easing Expectations
China’s rebound and EM (global?) rate cuts should be powerful drivers for EM assets – especially EM debt – this year. The question is whether the market is getting ahead of itself in pricing in very sizable EM policy easing in the coming months (see chart below). EMs’ conservative monetary policy stance in 2021-2022 suggests that central banks (well, most of them) will cut only when it is safe to do so, and they will not necessarily be driven by actions of the U.S. Federal Reserve (Fed). For example, the Governor of the Philippine central bank alluded to rate cuts only in 2024 in his recent comments. Room for rate cuts in Brazil might be affected by the new government’s policy agenda (especially as regards the budget). Stay tuned!
Chart at a Glance: Market Expectations for EM Rate Cuts - Wow!
Source: Bloomberg LP.
Related Topics
Related Insights
Related Topics
Related Insights
February 26, 2024
January 04, 2024
October 27, 2023
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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
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.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.