By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation
The market believes that aggressive rate hikes in parts of emerging markets will be followed by rate cuts later in 2022 as growth falters and disinflation sets in.
“Hawkish” surprises in EM and DM
It could be a strange question to ask after apparently warmongering captures in the United States and Canada, an expected rate hike in South Africa, a surprise rate hike in Kazakhstan and an even bigger warmongering surprise in Chile – but please bear with us. Let’s first look at developed markets (DM). The “hawk” part in the US came from US Federal Reserve (Fed) Chairman Jerome Powell’s remark that the policy rate can be raised at every meeting – that’s potentially 7 hikes in 2022 instead of 4 predicted by Fed Funds Futures ahead of yesterday’s meeting. When we checked our Bloomberg screens this morning, yet, Fed Funds Futures only showed a slightly higher implied rate hike in March (30 basis points) and about 4.5 total hikes for 2022 – not a big change. The output of the advanced US fourth quarter GDP print could explain market hesitation – even though the annualized quarterly growth rate was much higher than expected (6.9%), about two-thirds came from higher stocks (not the best ratio).
EMs maintain frontloading rate hikes
Meanwhile, in Emerging Markets (EM), the market was taken by surprise by a bold 150 basis point rate hike in Chile. The fact that the central bank chose to anticipate further tightening is understandable – the economy shows signs of overheating (economic activity shows double-digit growth, fueled by multiple withdrawals from private pension funds and public spending – see chart below), Headline inflation jumped to 7.2% from year to year and the budget deficit was close to 8% of GDP Last year. yet, a combination of the lagged impact of rate hikes and a large fiscal adjustment (reduction of the fiscal deficit to around 4.2% of GDP in 2022) should bring Chile’s real GDP growth fell from 11.5% in 2021 to just 2.5% in 2022. What would the central bank do in this situation? The market thinks it will be forced to reverse course and start easing in 6-12 months.
Dovish rate expectations in emerging markets
Apparently, Chile is not the only major emerging market – outside of China (where small rate cuts are expected in 3-6 months) – where the market now awaits the return of the doves. Brazil could be on a similar path in LATAM. In emerging Europe, Poland, Russia and the Czech Republic should also lower their key rates within 6 to 12 months. Rising rates in DM/US vs falling rates in EM – this would be an interesting scenario for H2-22. Stay tuned!
Charts at a Glance: Chile’s Growth – Beyond the Weak Base Effect
Source: Bloomberg LP
Originally published by VanEck on January 27, 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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