Trade Wars

Inflation front and center | Nasdaq

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation

Summary

Rising inflationary pressures in emerging market Asia signal that regional central banks may need to tighten sooner than expected. Peru declares curfew in response to anti-inflation protests.

Inflationary pressures in emerging Asia, political reaction

Bullish inflation surprises in several Asian economies caught our attention last night. The numbers may still look “weak” compared to their EMEA or LATAM counterparts – Thailand’s prices are up 5.73% YoY, South Korea’s 4.1% YoY and those of the Philippines by 4% year-on-year. However, when we express headline inflation in standard deviations over 5 years of history, the picture looks more pressing, especially in South Korea (2.6 higher standard deviations) and Thailand (3.75 higher standard deviations) – they are tied with LATAM! Rising inflationary pressures signal that the region may no longer be able to stay away (= key rates unchanged), when the rest of the world accelerates rate hikes.

Outperformance of LATAM local bonds

LATAM has raised its key rates quite aggressively in recent months, and the the improvement in the political cushion has contributed to the outperformance of local bonds since the beginning of the year. The region has outperformed all other Emerging Markets (EM) (with the sole exception of South Africa, see chart below), so we are watching the recent changes in central bank response functions (lower than expected rate hikes in Chile and Colombia) with a lot of interest. This week’s big inflation data dump – Colombia later today, Chile, Mexico and Brazil later this week – will show whether this relatively accommodative policy is warranted.

Food prices and social protests

In a more worrying developmentwe see more reports of anti-inflationary protests in emerging markets. the The Peruvian president was forced to declare a curfew Tuesday (in the capital) after protests spread and turned violent. These reports followed social unrest and the resignation of the government in Sri Lankaand the dissolution of from pakistan National Assembly. Other vulnerable countries heavily dependent on wheat exports from Russia and Ukraine – such as Tunisia – are working hard to source from alternative sources (and find financing) to avoid the rehearsal of the Arab Spring. Stay tuned!

Chart at a Glance: LATAM Local Bonds On A Roll

Source: Bloomberg LP

Originally published by VanEck on April 5, 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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