Citius, Altius, Fortius! | Nasdaq
Natalia Gurushina, Chief Economist, Emerging Markets Bond Strategy, Van Eck Partners Company
Warmongering expectations for global rates and high short-term inflationary pressures echo the first two words of the famous Olympic currency. Does “Stronger” Still Apply to Global Growth Prospects?
There is less than a month left before the Olympic Winter Games, and the market narrative seems perfectly in tune with the famous motto “Citius, Altius, Fortius!” – “Faster, higher, stronger!” “Faster” is a good way to describe a more hawkish outlook for policy rates., particularly in the US The implied probability of March’s take-off reached 81% this morning (based on Fed Funds Futures – see chart below), and the market is now seeing a total of 88bp increases over over the next 12 months, with a strong possibility of a reduction in the Federal Reserve’s balance sheet (quantitative tightening, QT). Emerging markets are not yet done with rate hikes. Peru raised its key rate by 50bp yesterday and Mexico’s central bank minutes looked rather hawkish. Argentina also joined the rate hike club yesterday (+200 basis points to 40%), but without a credible fiscal consolidation plan, this policy move sends the signal that “winning is not what matters. . [the inflation battle], but by participating ”(continuing the Olympic theme).
“Higher” is an apt allegory for short-term inflation risks. We have a number of inflationary surprises on the rise today – including the eurozone’s record 5% year-on-year level, annual headline inflation of 7.2% in Chile and the frightening jump in Poland. at 8.6% yoy, which led to official suggestions on reductions in VAT (value added tax). There are signs that inflation could peak in parts of emerging markets – check today’s headlines in Mexico for example. In addition, a very high base effect should pave the way for disinflation in H2. But short-term inflation dynamics will keep emerging market central banks in a hawkish mode.
“Stronger” is not really a statement, but rather a question mark about this year’s growth momentum. – both in emerging markets and in advanced economies, especially if expectations of market policy normalization prove to be correct. The 2022 consensus growth forecast for the United States has been lowered to less than 4%, and growth in emerging markets excluding China is expected to slow to 4.44%. In emerging markets, all eyes are now on Brazil – it is expected to grow by less than 1% this year, in part due to very aggressive political tightening in 2021. The next round of domestic activity indicators and China’s credit aggregates (next week) will also be closely monitored for signs of lasting improvement and the need for greater political support. Stay tuned!
Chart preview: Market expects US Fed to take off in March
Source: Bloomberg LP
PMI Index – Purchasing Managers: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – PMI Supply Management Institute: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; both in 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 – Price index of personal consumption expenditure: a measure of US inflation, following the evolution of the prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: a US provider of equity analysis tools, fixed income securities, hedge fund market indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectations for 30-day volatility. It is constructed using the volatilities implied on the options of the S&P 500 Index .; GBI-EM – JP Morgan’s Government Bond Index – Emerging markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by governments in emerging markets; 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 Global Emerging Markets Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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