EM Hawks – Decreasing convictions?


By Natalia Gurushina

Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Partners Company

A weaker-than-expected rate hike in Hungary has raised additional questions about political frontloading in emerging markets, despite very hawkish remarks from Brazil and the Czech Republic.

Central banks in EMEA and LATAM continue to work (with notable exceptions like Turkey), but some seem to have doubts about very aggressive rate hikes. Take Poland or Hungary, for example. Poland slowed the pace of tightening in November to 50bp. The Hungarian central bank raised its key rate again this morning, but the extent of the hike was smaller than expected (30 bps). The local bond market is monitoring Hungary’s monetary policy trajectory very closely due to (1) the central bank’s plan to end its bond purchase program “at short notice” and (2) the impact of pre-election spending on the budget deficit, which could partially offset the rate hikes.

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For what it’s worth, Hungary’s (and Poland’s) position is in line with the consensus view policy rates in emerging markets (EM) over the next 12 months (see table below). Frontloading of rate hikes expected to peak this quarter, with political tightening continuing into 2022 at a slower pace due to moderating inflationary pressures and growth. Recent communications from some central banks are however questioning this timetable. Brazil’s minutes sounded very hawkish, and Gov. Campos Neto referred to a “sense of fiscal mess” and “detachment” from inflation in his remarks. The governor of the Czech National Bank said the key rate should be closer to 4% than 3%, which may add another hike to consensus opinion.

When it comes to downward convictions, no other institution attracts more attention in SE than the turkish central bank – although in the opposite direction. The question is whether the authorities are approach the threshold of pain that would lead to a reversal of hawkish policy. Yesterday, the central bank chose to intervene against “unhealthy price formations”, pushing the lira below 14 / US dollar. But the currency is experiencing another nervous breakdown this morning – trading at 410 basis points against the US dollar (at 10:03 a.m. ET, according to Bloomberg LP) as the central bank tries to determine what to do next. Meanwhile, the the consensus still expects a 100bp drop on Thursday. Stay tuned!

Chart Snapshot: Emerging Market Rate Hikes Expected to Peak in Q4

PMI Index – Purchasing Managers: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – PMI Supply Management Institute: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; both in 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 – Price index of personal consumption expenditure: a measure of US inflation, which tracks changes in the prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: a US provider of equity analysis tools, fixed income securities, hedge fund market indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectations for 30-day volatility. It is constructed using the volatilities implied on the options of the S&P 500 Index .; GBI-EM – JP Morgan’s Government Bond Index – Emerging markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by governments in emerging markets; 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 Global Emerging Markets Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

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