Band Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
The market continues to question the speed of monetary policy adjustments – up (US, UK, Poland) and down (China).
Headwinds to Chinese Growth and Policy Response
Today’s price action shows that the market continues to question the policy responses of major central banks. The implied probability of a 75 basis point rate hike in the US has started to climb again, and in Europe the July take-off is now firmly priced in. Calibrating policies does not always mean more hawkish. In the case of China, the market is crying out for more political support. The latest titles, however, seemed inconsistent. On the one hand, the central bank is talking about more policy coordination and structural monetary policy tools to support the economy. In contrast, the Politburo has asked to “resolutely” stick to the dynamic zero-COVID policy, despite dire activity gauges for services. The consensus sees only tiny reductions (about 5 basis points) in the medium-term lending facility rate and the prime lending rate – believing that most of the support will come from the fiscal side. The next credit aggregates should give us more color on the budgetary commitment.
Polish central bank lagging behind?
Concerns about policy calibration are also being heard loud and clear in Poland (a major component of JP Morgan’s local EM bond index, GBI-EM). The central bank’s minutes looked more hawkish than yesterday’s below-consensus rate hike of 75 basis points, but whether that will translate into a faster pace of policy tightening is unclear. Poland’s real policy rate adjusted for expected inflation is among the most negative in emerging markets (EM) (see chart below), and if the central bank continues to do the same, the performance of local bonds will continue to suffer.
LATAM policy frontloading
The last monetary policy decisions in LATAM seem more aligned with reality. Chile up more than expected Thursday (125 basis points), and today’s above-consensus inflation figure (10.5% YoY) justified this decision. Colombia maintained the pace of tightening in April (+100 basis points), and the latest inflation figure (9.23% YoY – a big surprise on the upside) shows that the central bank is moving in the right direction. Brazil could extend its tightening cycle through June (and possibly August) in response to lingering inflationary pressures. Mexico’s central bank will resist pressure to tighten less? Stay tuned!
Chart at a Glance: Emerging Market Real Policy Rates – Wide Range of Expected Outcomes
Source: VanEck research; Bloomberg LP
Originally published by VanEck on May 6, 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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