Market Panic vs. Policy Options
May 12, 2022
Read Time 2 MIN
The markets are in a somber mood today, as investors assess growth/inflation policy tradeoffs and China’s growth/COVID challenges.
Global Growth/Inflation Tradeoffs
It’s Day 4 of our research trip to Central Europe, and the deteriorating global sentiment – against the backdrop of upside inflation surprises, growth headwinds and concerns about available policy space – permeates all discussions. Two issues that pop out most frequently are: (1) share of inflation that can be attributed to global factors (=whether central banks can address price pressures without slowing the economy too much); and (2) coordination between monetary and fiscal policies (=growth/inflation trade off). Both issues are relevant not only for EMEA (or wider emerging markets (EM)), but also for developed markets (DM). An example of the latter are growth headwinds in the U.S. created by a combination of fiscal and monetary tightening. By contrast, a more accommodative fiscal stance in Europe might help to mitigate at least some recession risks.
Global/Domestic Inflation Drivers
Central banks emphasized during our meetings that rate hikes can only target a small portion of upside inflation pressures stemming from domestic demand (20% or so). And at times, some of them sounded as if their job (rate hikes) was almost done. However, underestimating the second-round effects from global price shocks can result in falling behind the curve, putting more pressure on local bonds and currencies. We will be having two more rate-setting meetings in other parts of EM this week – Mexico (+50bps expected) and Peru (+50bps expected), and it will be interesting to see how these challenges are addressed by their respective central banks.
China FX Weakness Tolerance Limit
China might be far from Europe geographically, but it is always an important part of regional discussions due to trade connections and the renminbi’s role as a general anchor for many EM currencies. The renminbi continued to creep closer to not-so-magnificent 7 against the U.S. dollar, with another big move today (down by 100bps as of 8:25am ET, according to Bloomberg LP). We maintain that this is the right direction, given the shrinking interest rate differentials with the U.S., capital outflows and near-term growth concerns. However, the speed of the adjustment might be too fast for the central bank, so we would not be surprised to hear more from it in the not-so-distant future. Stay tuned!
Chart at a Glance: Chinese Renminbi’s Depreciation - Too Fast for Comfort?
Source: Bloomberg LP
Related Insights
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.
Related Insights
May 27, 2022
Some countries buck negative trends in global economic surprises, but China is not one of them. The “feel good” factor stemming from the improving growth outlooks can affect policies in parts of LATAM.
May 26, 2022
We are hearing some dovish noises in EMEA - even though inflation says it is premature. Most central banks elsewhere have gotten their policy priorities straight, though.
May 25, 2022
U.S. Treasury closes the debt payment loophole for Russia. EM central banks keep an eye on the policy rate differential with the U.S. Fed.
May 24, 2022
A lot of EM inflation surprises are to the upside. Can weaker growth pave the way to disinflation, or is stagflation still the baseline?
May 23, 2022
The market continues to comb data releases for signs of global recession. Meanwhile, Ukrainian refuges in EMEA can help to boost local consumption, but also raise inflation pressures.