EM Disinflation Signs

The biggest shock of the day in emerging markets (EM) is Argentina’s soccer squad losing to Saudi Arabia in the World Cup – where’s the IMF when one needs it? And the rest of the week can bring more surprises – especially on the inflation front. South Africa will release its October inflation print tomorrow, Malaysia’s inflation will be out on Thursday, and Brazil and Mexico will report mid-month inflation also on Thursday. The market is on the lookout for (further) disinflation in all four countries, and there is also an additional fiscal discipline “layer” in Brazil and Malaysia. The IMF just issued a timely reminder (a blog) about the impact of fiscal tightening on core inflation – fiscal slippages can impose more pressure on central banks to tighten in a softer growth environment. For example, the market priced out most rate cuts in Brazil in 2023 due to concerns about President-elect’s spending plans, adding nearly 70bps of rate hikes in December-March – despite impressive disinflation.

EM Asia Peak Inflation

The Malaysian parliamentary elections (a hung parliament) introduced additional fiscal uncertainty. Still, October’s inflation is expected to ease a lot (from 4.5% year-on-year to 3.9%) – in line with a thesis that EM Asia can disinflate faster and with much lower peaks than the rest of EM. In theory, this should leave more policy space to deal with weaker growth going forward. Inflation in most EM Asia is expected to return to target by H2-2023 (see chart below), whereas most of EM Europe and LATAM would have to wait until 2024 to get there.

EMEA Policy Tightening

South Africa is the only major EMEA economy which can get back to their inflation target next year. This is the reason why this week’s inflation release and the central bank’s rate-setting meeting will be closely watched. The central bank delivered two unusually large (75bps) rate hikes in a row – and the consensus expects a similar increase on Thursday, believing that the board would err on the side of caution, with the worsening global backdrop and the return of the current account deficits. South African local bonds held on reasonably well so far this year, as high interest return helped to offset a big chunk of currency and price losses. However, the sentiment might turn sour, if the market thinks the (previously super-credible) central bank is falling behind the curve. Stay tuned!

Chart at a Glance: EM Inflation Target – Uneven Progress

Source: Bloomberg LP.