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EM Rates – On Hold but Hawks Circling

By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy

EM central banks are staying on hold this week, but they are far from being dovish. Brazil’s newsflow raises more concerns about spending and debt ratios.

Emerging markets (EM) central banks do not feel particularly adventurous this week—keeping policy rates unchanged (South Africa, Hungary, Czech Republic, Philippines, Thailand), but closely monitoring domestic developments (inflation, COVID’s waves) and constantly re-evaluating global risks. Mexico’s rate-setting meeting in the afternoon is the most interesting one. At the moment, the market prices in nearly five full rate hikes in Mexico over the next 12 months, but nothing for this week—a bet that an increasingly dovish central bank would treat the inflation target breach as transitory.

Brazil’s newsflow looks more and more challenging—especially for the local bond market. Economy Minister Paulo Guedes’s warning about the worsening COVID situation (“a new war has started”), the Supreme Court’s decision boosting ex-president Luiz Inácio Lula da Silva’s (Lula) chances to run again, governors asking for a larger emergency aid package and Moody’s warning on rating are all bad signs for spending, local yields and debt sustainability. It is hardly surprising that the market now prices 110bps of rate hikes for the central bank’s next meeting in May (compared to 64bps just two weeks ago).

Turkey’s policy U-turn #2 raised legitimate questions about the country’s sovereign rating. One agency that is being watched particularly closely is S&P, because many commentators believe that Turkey does not belong in its peer group (see chart below). S&P’s statement (released yesterday) shows particular concerns about Turkey’s policy predictability and the external position (including the fact that locals are converting to “safe haven” assets such as gold as foreign currency). Capital controls are not yet in S&P’s base case scenario—any moves in this area can tip the balance towards removing positive outlook.

Charts at a Glance: Turkey and Its S&P Rating Peer Group – An Odd One?

Originally published by VanEck, 3/25/21


IMPORTANT DEFINITIONS & DISCLOSURES  

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; 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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