Emerging Markets Debt Daily
EM – Local Policies vs. Global ConcernsNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 19, 2021
EM central banks will be making rate-setting decisions amongst diverging inflation/growth outlooks and another global risk-off episode.
This week will be packed with important events both in emerging markets (EM) and developed markets (DM), and it started with a risk-off “bang” - most EM currencies and equity indices traded in the red this morning, while the 10-year U.S. Treasury yield dropped below the 1.20% handle. Even though the current recovery in the U.S. is shaping up to be the fastest since World War II, the growth scare is back due to the virus mutations concerns - hence the focus on the additional fiscal stimulus and the U.S. Federal Reserve’s taper talk. The virus resurgence theme affects the EM narrative as well - albeit the impact on the near-term growth outlook is very uneven, with forecast downgrades concentrated in Asia, where the vaccination rates are the lowest.
Growth is not the only area where we see a lot of differentiation among EMs. The EM inflation “heatmaps” – both headline and core – are far from uniform. The same applies to a key monetary policy consideration – how actual inflation looks relative to the inflation target (see chart below). Inflation in many EMEA and LATAM countries is either above the target or close to the top of the target band. By contrast, inflation in EM Asia is still mostly within/below the target band.
This divergence underpins the expectations for the upcoming rate-setting decisions in EM. The consensus now sees an 88bps rate hike in Russia on July 23, but no changes (yet) in Indonesia or South Africa. South Africa might be considered a special case, as the central bank’s meeting takes place shortly after the deadly riots. But nevertheless, most forecast revisions focus on growth (lower) and budget deficit (wider) rather than inflation. Another interesting case is China, where the 1-year and 5-year Loan Prime Rates will be announced later today. The consensus sees no change in both, but there is less certainty about the overall policy stance following the surprising “blanket” cut in the reserve requirements for banks.
Charts at a Glance: EM Inflation vs. Targets – Not A Uniform Picture
Source: Bloomberg LP
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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