Summary
The market is not yet in a hurry to price in additional tightening in EM, despite bringing forward rate hikes in Europe and the U.S.
DM Rate Hike Expectations Brought Forward
Most Asian emerging markets (EM) look pretty “boring” these days compared to developed markets (DM) or peers in EMEA/LATAM when it comes to inflation and policy rates. Brazil’s rate-setting meeting will be closely watched this afternoon, especially as regards the central bank’s assessment of the disinflation prospects. In the U.S., the chatter about a 50bps hike in March refuses to go away – despite the “Omicroned” ADP Employment print, in part because the shocking decline (-301K) should be reversed next month. In Europe, the swap curve now prices in the first 10bps rate hike in July (!), and today’s massive upside inflation surprise (5.1% year-on-year vs. 4.4% expected) should keep these expectations alive – at least until the ECB’s meeting tomorrow.
Emerging Market Rate Hikes to Peak Soon?
The question is whether bringing forward the rate expectations in the Eurozone will have meaningful implications for Central Europe, where we will have two rate-setting meetings in the next 6 days. The consensus sees a sizable 75bps hike in the Czech Republic (after 100bps last month), and another 50bps of tightening in Poland would be completely justified given the rising wage pressures (+11.2% year-on-year in December). However, the market is not in a hurry to price in more tightening in the second half of the year. Rate hikes in Poland, Hungary, and the Czech Republic are expected to peak around mid-year, with a possibility of gradual easing later on. We see a very similar pattern in parts of LATAM (Brazil, Chile).
Gradual Liftoff in EM Asia
Going back to EM Asia, the regional rate expectations are largely drama-free – mostly because of drama-free inflation. Indonesia got a small round of applauds today when its annual inflation re-entered the central bank’s target range in January – from the low side that is (see chart below). Tomorrow’s inflation print in the Philippines should confirm that inflation had peaked in Q4. Thailand’s headline inflation is expected to grind higher (to 2.47% year-on-year in January), but it will remain within the target range. Therefore it should not come as a surprise that the market places the beginning of rate hiking cycles in most Asian economies (outside of China and South Korea) in Q2. Will India surprise on a hawkish side on February 8 or follow a “cautious” script? Stay tuned!
Chart at a Glance: EM Asia Inflation – Don’t Worry, Be Happy
Source: Bloomberg LP