EM rate – No deviation from the status quo
Through Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
Brazil maintained the same pace of rate hikes (75 basis points) and guidance. Turkey was left hanging with a seemingly hawkish statement – but is it just lip service?
“More of the same” – The Brazilian central bank continued to anticipate rate hikes, maintaining the same pace (75bp), the same orientation (75bp) and the same reasoning (“partial normalization”). A less uncertain fiscal environment has eased the pressure on the central bank to act more aggressively in the short term. However, the real policy rate remains deeply negative (see chart below) – not the best configuration in a context of rising inflation. The emerging narrative is that Brazil is on a political buyout path – measured central bank tightening would fit in perfectly.
“Reluctanlty?” – Turkey has kept its key rate at 19%, with seemingly cautious verbiage (in the sense of keeping policies tight until inflation is much lower). The next move from the central bank is almost 100% certain to be a rate cut – the question is when and how much. Most commentators agree that there is no room for a cut until much later this year (fundamentally). The governor, however, estimates that inflation will peak in April – hence fears he might opt for a token cut (50 basis points) at the next meeting.
“Virus problems” – The resurgence of COVID – and in particular its impact on growth – has dominated pricing meetings in the Czech Republic, Malaysia and Thailand. The three central banks remained on hold in April, but the Czechs appear to be the most prepared to step up once the pandemic situation becomes clearer. One factor that could affect the Czech timeline is the appreciation of the currency. The market has clearly noticed the country’s inflationary pressures and a very solid growth rebound – and the central bank knows from past experience that a stronger currency can serve as a substitute for rate hikes.
Charts at a glance: Brazil – Real policy rate is still deeply negative
Source: VanEck Research, Bloomberg LP
Originally published by VanEck, 05/06/21
IMPORTANT DEFINITIONS AND INFORMATION
PMI – Purchasing Managers Index: economic indicators derived from monthly surveys of private sector enterprises; ISM – Institute for PMI Supply Management: The ISM publishes an index based on more than 400 surveys of purchasing and supply managers; both in manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail products and other items; PPI – Producer price index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE Inflation – Personal Consumption Expenditure Price Index: a measure of inflation in the United States, which tracks changes in the prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: a US provider of equity market indexes, fixed income securities, hedge funds 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 volatilities implied on the 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 Emerging Markets Bond Index: The JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Global Emerging Markets Bond Index: tracks total returns of external debt securities traded in emerging markets.
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