Band Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
Rising US inflation and the ECB’s hawkish pivot have raised questions about the implications for emerging market central banks, which have already priced in plenty of hikes but face new inflation risks.
Standardization of policies in the United States and Europe
things took a resolutely warmongering turn this morning – especially in Europe. The European Central Bank (ECB) surprised the market by announcing an early end to its bond buying program and removing the reference to “lower than current” rates. To be fair, the statement was open enough, but the European yield curve flattened (short rates rose more than long rates), while the swap curve brought forward the first ECB rate hike to July and significantly ‘reinforced’ expectations of a global policy tightening in 2022. What does the ECB’s hawkish pivot mean for Central European economies?
Inflation in emerging Europe, rate expectations
Good, Central European central banks had already anticipated many rate hikes – including yesterday’s hawkish surprise in Poland (+75bps) – corn the latest versions show that (a) inflationary pressures persist, and (b) they are broad-based. Hungarian inflation accelerated more than expected in February (8.3% yoy) and Czech inflation jumped to 11.1% yoy, well above expectations. We were therefore a little surprised to see the 3-month market expectations for these two countries ease this morning compared to a few days ago. With near-term inflation risks firmly on the upside and headline Central European inflation resembling LATAM, the widening gap between expected terminal policy rates in the two regions (see chart below) is increasingly questioned.
LATAM monitors the US Fed
Talk about LATAM, U.S. Federal Reserve outlook is more important. US inflation today looked scary (7.9% YoY), but was in line with consensus, which is why expectations for the Fed’s March rate hike implicit in futures on federal funds have not changed much. The market, however, is now back to pricing further Fed hikes in 2022 (6-7). And it keeps LATAM central banks on their toes. Inflation expectations in Chile continued to deteriorate. Colombian board member Roberto Steiner seemed very hawkish yesterday. In Brazil, the market is pushing for two rate hikes of 100 basis points in a row (March and May). Mexico’s central bank board, however, appears more divided. Will the new governor stick to his hawkish message later this month? Stay tuned!
Chart in brief: Do emerging market interest rate expectations accurately reflect reality?
Source: VanEck research; Bloomberg LP
Initially published by VanEck on March 10, 2022.
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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods 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 US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan 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: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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