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EM Rates – Choose Wisely

By Natalia Gurushina. Chief Economist, Emerging Markets Fixed Income

Exiting EM Tightening Cycles

The market is gearing for another rate hike by the U.S. Federal Reserve (Fed) next week and more policy tightening in Europe. In the meantime, emerging markets (EM) central banks are moving in different directions. Many opt to stay on hold, despite successful disinflation, due to widespread concerns about sticky core prices and high inflation expectations. Factors like Brazil’s fiscal uncertainty (see chart below) and a potentially larger minimum wage increase can easily contribute to the latter.

EM Rate Cuts

Several EMs outside of China are testing the waters with inaugural rate cuts – Uruguay, Costa Rica and Hungary’s Lombard rate cut – betting on a combination of a very supportive base effect and weakening domestic activity. However, these attempts are generally met with skepticism by the market (=weaker currencies), because there are plenty of headline risks (Argentine mega-drought, OPEC’s production cuts, El Nino) and policy reversals can be costly (including credibility).

EM Rate Hikes

Finally, there are still some EM rate hikes in the pipeline. Of course, Argentina’s gargantuan +1000bps (!) move yesterday is a sign of desperation (as the underlying reasons for triple-digit inflation and other imbalances are still in place), but the consensus added a more reasonable 25bps “insurance” rate hike for Colombia in the wake of the cabinet reshuffle. The tightening cycle might also not be over in South Africa and Thailand. Thailand could be a victim of its own success, as demand-side price pressures might increase on the back of stronger tourist arrivals (including China) and faster GDP growth. Stay tuned!

Chart at a Glance: Brazil’s Fiscal Path – A Wrong Turn1

Chart at a Glance: Brazil's Fiscal Path - A Wrong Turn

Source: Bloomberg LP.

1 Brazil’s Public Primary Budget (BZPBPR Index) balance excludes debt servicing costs (payments of interest and amortizations of the public debt, as well as state and municipal loans).

Originally published 28 April 2023. 

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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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.

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