Increase in EM tariffs
Emerging Markets (EM) Asia inflation is at its peak, while growth prospects outside China remain better than in other emerging regions (see chart below). This explains why regional central banks are in power forward with anticipated rate hikes. India still surprised today on the warmongering side, delivering a larger than expected rate hike of 50 basis points. The impression of inflation above consensus in the Philippines suggests that the central bank and the new governor will make another significant rate hike in August. And Indonesia’s faster-than-expected GDP growth in the second quarter (5.44% year-on-year) will test the central bank’s resolve to hold off at the next meeting. Maybe the most intriguing monetary policy case in the region is the Bank of Thailand. The country’s inflation is more than 3 standard deviations above the 5-year trend, but the long-awaited take-off has yet to materialize. Today inflation the output (July) was a bit weaker than expected, but that’s high enough to pave the way for the first rate hike next week (some brave souls even expect 50bps movement). The hawkish pressure on Asian central banks – most of which came late in the current cycle – could increase after the surprisingly strong US jobs report, which could lead to tightening by the Federal Reserve. US (Fed).
EM policy normalization speed
On the other hand, we continue to get more accommodating surprises in Central Europe – even though headline inflation is in the mid to upper teens. Yesterday’s break in key rates in the Czech Republic was followed by a weaker than expected rate hike in Romania (+75 basis points). Hungary’s tightening “push” looks like the exception rather than the rule. One possible explanation for the Central European pacifist pivot is the rapid deterioration of short-term growth prospects (“cliff” of growth in H2). The latest activity surveys in Poland and the Czech Republic have shown a clear move deeper into the contraction zone, and central banks believe this may help ease domestic inflationary pressures going forward. The local bond market, however, might be less forgiving if it thinks central banks are lagging.
Rising Emerging Market Rates and Inflationary Pressures
Where does that leave LATAM? Brazil’s slower pace of tightening is well deserved – the central bank has been the trailblazer in the current cycle, and it has been walking very aggressively. But when it comes to Brazil’s regional peers, the picture is more nuanced. Today big surprise on rising inflation in Colombia – July inflation accelerated to 10.21% yoy from 9.67% in June, and core CPI jumped to 7.29% yoy – yells “Walk, baby, walk!” even after a large +150 basis point move a week ago. Chile’s decision to reinstate monetary interventions – which worked brilliantly – may help reduce price pressures, but the next inflation release (August 8) will be key. Stay tuned!
Chart at a Glance: Growth Downgrades – Some Emerging Regions Are More Immune
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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