By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
Institutional checks and balances allowed to avoid extreme price and policy outcomes in Peru and Brazil. But extreme inflation surprises keep coming.
Very often when we talk about institutional frameworks in emerging markets (EM), it is in a context of their weakness, which can lead to deteriorating economic metrics, rating downgrades, and a loss of investor confidence. But there are other – much more encouraging – examples (which can also create interesting trade opportunities). Take yesterday’s “lunchtime” coup attempt in Peru. President Pedro Castillo (who is now ex-President) tried to avoid impeachment by unlawfully dissolving the congress. But the congress had none of it, impeaching Castillo anyway, and putting him in jail. The line of succession was clear, and by the early-afternoon Peru had the first ever female president, Dina Boluarte. The currency – which sold off initially – ended up stronger against the U.S. Dollar (see chart below), and the central bank matter-of-factly delivered a 25bps “farewell” policy rate hike. The end.
EM Rate Cuts
Institutional constraints also allowed the Brazilian central bank to remain on hold yesterday – instead of delivering a “warning shot” rate hike to address new administration’s fiscal expansion plans. President-elect Lula’s grand (populist) vision for social spending underwent a reality check in the parliament, and the market responded by pricing out some rate hikes on a 6-month horizon. Fiscal risks are still here – they featured prominently in the central bank’s statement, and they can delay 2023 rate cuts. As of this morning, the local swap curve was seeing no policy easing until September 2023 (compared to March/May 2023 before the elections runoff).
Institutions is a major discussion topic in Mexico and Hungary, but today’s market focus was on inflation. It looks like Mexico is finally on the disinflation track – with both core and headline bi-weekly inflation much lower than expected at the end of November. This should allow the central bank to safely slow the pace of rate hikes (to 50bps at the next meeting in a few days). Hungary’s case is more complicated. Headline inflation accelerated above consensus in November (to 22.5% year-on-year), and it is now set to get even higher in December (peaking at 25-26%) after the removal of gasoline price caps. The caps removal can actually be beneficial for Hungary’s budget (and for bonds’ technicals), but it is also essential that the central bank maintains a hawkish policy stance until inflation starts rolling over in 2023. Stay tuned!
Chart at a Glance: EM Asset Prices (Peruvian Sol) – The Importance of Being Nimble
Source: Bloomberg LP.
Originally published on 8 December 2022.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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