Emerging Markets Debt Daily
U.S. Fed and EM – Carry On!Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyApril 29, 2021
The dovish Fed and solid U.S. growth create a supportive backdrop for EM, but the vaccine rollout will matter for the sequential recovery. Turkey issued a hawkish inflation report – next stop is the rate-setting meeting.
The U.S. Federal Reserve’s dovish hold and solid Q1 economic expansion in the U.S. should create a supportive global backdrop for emerging markets – albeit the vaccine rollout in Emerging Markets (EM) will prove an important differentiator in the coming months (the idea of sequential recovery). The U.S. is not the only growth driver for EM these days – an improvement in Europe’s economic confidence (released this morning) is a plus, and China will publish its April’s activity gauges tonight. From the market perspective (especially EM debt) we also keep a very close eye on real interest rates in the U.S. and factors that can move them one way or another – such as core personal consumer expenditures (PCE) for March (out tomorrow morning).
With only days left before the next rate-setting meeting in Turkey, the central bank’s new quarterly inflation report understandably attracted a lot of attention this morning. The report checked a lot of “hawkish” boxes, including a big upside revision of the 2021 inflation forecast (from 9.4% to 12.2%) and a pledge to maintain tight policies (=policy rate above trailing and expected inflation). The chart below, however, points to an important nuance. It’s not just the fact that the policy rate is positive that counts. The size of the policy “cushion” matters as well. The policy rate adjusted by trailing inflation is currently well below the levels seen in 2018-2019, and further reductions can leave the lira without proper protection.
The recent price action showed that the market is worried about the rise of populism in LATAM. While the presidential elections in Brazil and Colombia are the next year’s business, Peru’s presidential runoff – and the far-left candidate’s strong performance in the polls - is a more immediate concern. Pedro Castillo’s 100-day program looks like a big populist laundry list, but – importantly – Castillo said that he will respect the constitution and the central bank’s independence. Stay tuned!
Charts at a Glance: Is Turkey Real Policy Rate High Enough?
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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