Emerging Markets Debt Daily
Inflation Rollercoaster(s)Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 12, 2021
Most central banks believe inflation spikes will fade later this year. China continues to withdraw policy stimulus, as the recovery becomes more entrenched.
We’ve got a bunch of strange-looking inflation prints across the globe lately – and today’s “oversized” inflation surprise in the U.S. was not an exception. And similar to Emerging Markets (EM), the U.S. numbers reflected multiple distortions stemming from the last year’s low base effect, pent-up demand, movement restrictions, supply bottlenecks, etc. Most central banks do not see inflation spikes as sustainable – neither in the U.S. nor in EM – expecting them to fade in the second half of the year. An unusually wide gap between market-based inflation expectations in the U.S. and the inflation forecast produced by the Cleveland Federal Reserve (see chart below) is quite telling in this regard. As would be expected, the knee-jerk reaction was felt across EM as U.S. rates started to break out to the upside after the release.
China seems to be the only major economy in the world, which (1) cares about leverage, and (b) realizes that extraordinary policy support should not last forever. This is our main takeaway from today’s below-consensus money and credit aggregates for April. Does it mean that all policy support will magically disappear? No. But it will become even more targeted – like the recent extension of tax exemptions for small privately-owned companies. As regards the central bank, its latest statement was very much in line with “no sharp turns” approach, including a commitment to “targeted and appropriate” monetary policy. Chinese equities took today’s release in stride, with both the Shanghai Composite and the Shenzhen Composite indices up on the day.
Mexico’s industrial production showed stronger signs of life in March, expanding by 1.7% year-on-year. There are still some negative supply shocks, but today’s release is likely to reinforce the expectation that the central bank’s easing cycle is over (especially against the backdrop of sticky inflation). The market believes there is space for around 100bps of rate hikes in the next six-to-twelve months – not unreasonable, even with a larger number of doves on the central bank’s board.
Charts at a Glance: U.S. Inflation Expectations – Alternative Realities
Source: 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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