EMs – All Grown Up?
September 27, 2022
Read Time 2 MIN
EM Tightening Cycle
There were more signs of responsible policy-making in emerging markets (EM), as well as some nice macroeconomic results this morning. Central banks in Hungary and Nigeria delivered larger than expected rate hikes to combat persistent inflation pressures. Hungary’s nominal policy rate looks like it belongs in Latin America (LATAM) – at 13%, it is higher than all regional policy rates except Brazil (13.75%). There are good reasons why the Hungarian national bank had to go for another supersized hike (+125bps) – post-election fiscal adjustment is still slow, and domestic political noise adds pressure on the currency (hence, the need to “overcompensate” on the monetary front). Hungary’s example, however, underscores that EM is not a monolith – even within a region. Central banks in Poland and especially the Czech Republic are decidedly more dovish. The Czech National Bank is expected to extend its pause this week – at a mere 7% against the backdrop of 17.2% annual inflation.
Prospects For Rate Cuts In EM
Going back to Hungary’s nominal policy “neighborhood,” Brazil’s central bank minutes sounded hawkish despite signs of further disinflation. Mid-month inflation eased more than expected, dropping below 8% year-on-year (see chart below). However, not all of it was due to Brazil’s early and aggressive rate hike frontloading. Disinflation also reflected some tax cuts, which explains the central bank’s caution and intention to keep the policy rate “high” for a “sufficiently long period.” How long is “long”? Brazil’s local swap curve currently prices in rate cuts later in Q2-2023/Q3-2023. This is not impossible, provided there are no additional political complications (we are very close to the hotly contested elections) and inflation continues to move closer to the target range.
EM Easing And Exchange Rates
Brazil’s credible policy response to the inflation surge is one of the reasons why the Brazilian real remains one of the best performing global currencies so far this year. EMs are generally praised for tightening much earlier than developed markets (DM) peers in this cycle. “Grown-up” policies? Yes. But the real test for EMs might be their ability to start earlier policy easing without adverse consequences for economic fundamentals or asset prices. China’s easing (including small rate cuts) added to deprecation pressures on the currency, forcing authorities to step up policy support for the renminbi. So, it is not that simple. Stay tuned!
Chart at a Glance: Brazil Disinflation – Nice Optics*
Source: Bloomberg LP
*Brazil IPCA-15 CPI Extended National YOY Index - Index that measures Brazil’s YoY Consumer Price Index. IPCA is the benchmark inflation index observed by the Central Bank of Brazil.
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.