Rising rates – Is the end near?

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Emerging markets are keeping an eye on the evolution of the US Federal Reserve forecast, but domestic fundamentals, including the pace of disinflation and growth prospects, are just as important.

Fed rate cut

The focal point of the day is the US Federal Reserve (Fed) rate-setting meeting. US data flow – including the below-consensus ADP jobs change and the ISM survey – support a smaller +25bp move, but the main ‘attraction’ will be forecasts from the Fed. The market continues to price in rate cuts in 2023 (about 44 basis points), despite the Fed’s message being more hawkish. Market expectations for policy easing in emerging markets (EM) and developed markets (DM) create a potentially positive scene for lower interest rates, drive EM performance at the end of 2022, and so far this year. And that’s why EM folks will be glued to their Bloomberg screens this afternoon.

Emerging market disinflation

Some fundamental developments in emerging markets argue for an end to tightening cycles. Peak inflation is already behind most countries – today’s bad surprises in Indonesia and Peru are good examples. A high base effect will also help lower inflation in the coming months, as will lower energy prices. The latter will have a particularly strong impact in Central Europe, where headline inflation could drop to single digits in the fourth quarter. Lower inflation is a boon for emerging market real yields, which already look attractive relative to their emerging market counterparts (see chart below).

Favorable winds for growth from China and emerging markets

There are, however, risks – and that is why many emerging central banks are in no rush to open the door to rate cuts. Inflation is still far from official targets in most places. Fiscal stimulus could still be positive in several emerging markets (due to a more populist political agenda like in Brazil or an election cycle like in Poland). China could rebound at a faster pace – a potential upside risk for commodity prices, but also a major tailwind for emerging market growth, especially in countries with strong trade/tourism ties to China. China. The stronger than expected activity indicators (Purchasing Managers Index) today in Thailand, Indonesia and the Philippines gave food for thought in this regard. In Europe, manufacturing PMIs in Poland and the Czech Republic continued to rebound from low levels. If the growth outlook continues to improve, emerging market central banks may feel comfortable sitting on the sidelines for longer. Stay tuned!

Chart at a Glance: Real Local EM Rates – Nice Range!

Source: VanEck research; Bloomberg LP.

Initially published by VanEck on February 1, 2023.

For more news, information and analysis, visit the Beyond the Basic Beta Channel.

PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both 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 – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; 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 Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

The information presented does not imply the provision of personalized investment, financial, legal or tax advice. This is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Certain information may be provided by third party sources and, while believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. All opinions, projections, forecasts and forward-looking statements presented herein speak as of the date of this communication and are subject to change. The information contained herein represents the opinion of the author(s), but not necessarily that of VanEck.

Investing in international markets involves risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve increased risks related to the same factors as well as increased volatility, lower trading volume and less liquidity. Emerging markets may have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

Any investment is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that the investment objectives will be achieved and investors may lose money. Diversification does not guarantee a profit or protect against loss in a declining market. Past performance does not guarantee future performance.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.