Emerging Markets Debt Daily
Higher Inflation, Steeper Yield Curves?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 11, 2021
A low base effect pushes EM headline inflation higher. Central banks consider it transitory – can global cost-push pressures be a game-changer, causing local yield curves to re-steepen?
We’ve got a lot of inflation releases across Emerging Markets (EM) this morning – and many of them are higher than expected. Last year’s very low base effect is very much at play here – especially as regards headline inflation. But core prices are still (mostly) well-behaved. This signals that central banks should be willing to look through upside surprises, waiting for the base effect to fade away before making decisions on rate hikes. The expectation that inflation will be peaking soon might have contributed to some flattening of local yield curves in Q2 (see chart below). There is a new kid on the block, however – global cost-push pressures in the form of higher commodity prices. The pass-through to consumer prices varies country by country, but we would not be surprised to see another re-steepening push if central banks continue to wait on the sidelines.
Turkey’s current account remained stuck well below zero in March (-USD3.33B). Strong imports is one reason why – we are yet to see a meaningful impact of higher rates on loan growth and domestic activity (it takes time). Rising commodity prices and uncertainty surrounding revenue from tourism pose additional near-term risks. These factors were mentioned in the just-released central bank’s minutes – raising hopes that monetary authorities will not rush to ease prematurely.
South Africa’s stronger than expected manufacturing production (up 4.6% year-on-year in March vs 1.1% expected) is like icing on the cake. The country’s fundamental backdrop improved in the past few weeks, including the more realistic 2021/22 budget and better revenue collection. Both the currency and the local debt markets are increasingly buying into this story – a stronger post-pandemic rebound can make it even more believable.
Charts at a Glance: EM Local Curves – Time To Re-Steepen?
Source: VanEck Research; Bloomberg LP
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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