In keeping with the theme of our recent blogs, another complicated week has passed in emerging markets. The last time we checked in, our asset class was feeling the heat, with the huge upside surprise CPI print for April reigniting fears of early Fed intervention and the dreaded taper tantrum. Over the last week, emerging markets (EM) have been once again ping-ponged by headlines emanating from the United States. Early week stability, fostered by the cooling of upward pressure in core-market yields, was quickly washed away by the surprisingly hawkish FOMC minutes for April. With the Fed now talking about talking about tapering, it is of no surprise that uncertainty prevails in our asset class. The disruptive consequences of policy tightening are no longer just a developed market central bank issue.
It is fair to say that EM policy makers are also feeling the heat; most economies have not escaped the challenge of mounting inflation pressure, born out of COVID supply bottlenecks and fiscal policy driven commodity price rises. At the same time, policy makers face the challenge of exceptionalism in the US/China; all else equal, where growth differentials skewed against emerging markets, capital outflows are likely to flow away from emerging markets. This seamless flow of global capital is forcing a synchronicity of monetary conditions across emerging economies despite a sharp asynchronicity of their recoveries from the pandemic. As a result, we have already seen a number of rate hikes in emerging market economies at a time when most are still struggling to recover from the initial pandemic, suffering ongoing reinfection waves and have huge debt burdens in light of their pandemic responses.
Czech National Bank (CNB)
In a race for Europe’s first rate-hike of the pandemic era, the Czech National Bank remains out in front. While the CNB’s tightening bias is not new news, the May committee minutes released this week suggest that rate hikes could be coming sooner rather than later. In a notable firming of tone, a majority of board members agreed that “the monetary policy tightening decision had moved much closer since the last meeting” with two participants explicitly stating that “raising interest rates…at the late-June meeting was de facto consistent with forecasts and keeping inflation close to the target”. The CNB continues to grapple with surging inflation which has outstripped the 2% bank target; CPI increased by 0.8% from March to 3.1% in April, with the move largely driven by fuel and food prices. Market pricing for CNB has reacted strongly to this week’s change in central bank guidance with approx. 120bps of rate hikes now expected over the next year. Looking forward, we believe the upcoming CNB meeting in June is now very “live”.
Central Bank of Hungary (NBH)
While the CNB remains the firm favourite for the first CE3 rate hike, Hungary has this week emerged as surprise challenger, with the CBH Deputy Governor hinting that surging prices will be met by tighter monetary policy as soon as next month. While the CBH has stepped up its hawkish rhetoric over recent months, these comments have come as a shock for market participants and have sharply raised the prospect of rate hikes in Hungary. The Deputy Governor noted, “inflation risks have unequivocally risen” and that “Hungary should consider a benchmark rate hike in June”. Much like their contemporaries at the CNB, inflation pressure has clearly spooked the CBH, with CPI accelerating beyond the 3% target over recent months. Inflation data for April surprised sharply to the upside, with CPI accelerating 1.4% from March to reach 5.1% in April, with fuel and energy prices again the culprits. Once again, the market expectations have shifted, with 84bps of rate hikes now expected in Hungary over the next year. Looking forward to next months meeting, the race is now on between the CNB and CBH; we could yet end up with a photo finish.
National Bank of Poland (NBP)
While the National Bank of Poland is bringing up the rear behind the CNB and NBH, over the last week or so we note hawkish dissident from members within the Polish MPC. As many as three members have stated that policy tightening is needed, with one going as far as saying the MPC “can no longer afford to watch growing prices passively” and another posturing that a “10-15bp rate hike might be worth considering”. While its interesting that there could be changes afoot within the MPC, the Governor’s voice matters most; he has recently stated that the NBP should wait until next year before hiking. Looking forward, the dynamics within the MPC are worth watching; arguably, Poland is facing even greater inflation momentum than CE3 contemporaries at the CNB and NBH; CPI accelerated by 1.1% from March, reaching 4.3% in April, comfortably above the 2.5% MPC target. The underlying price pressure and hawkish dissent has not gone unnoticed, with markets now pricing 69bps of NBP hikes over the next year. While the NBP remains the outside bet, this runner is well worth watching over the next few months for a more meaningful change of guidance.
As noted last week, on the desk, we remain cautious when it comes to emerging markets. In our view, US exceptionalism is highly likely to result in further market tests of the accommodative stance of the Federal Reserve, higher core market yields and episodic pressure on emerging markets. It is no surprise to us that most emerging markets struggling to digest the ongoing policy debate in the core and at home. As noted above, we believe that we are close to peak monetary policy stimulus in most emerging markets, as demonstrated by events in CE3 this week. In our view, fiscal policy will be the likely go to policy tool to insulate the post-COVID rebound. We continue to favour the EM economies which have the robust underlying fiscal strength to withstand the volatile backdrop and provide the required support to emerge successfully from the pandemic.
Sources
Czech National Bank https://www.cnb.cz/en/monetary-policy/monetary-policy-reports/Monetary-policy-report-Spring-2021/
Central Bank of Hungary https://www.mnb.hu/en/the-central-bank
National Bank of Poland https://www.nbp.pl/homen.aspx?f=/en/aktualnosci/2021/mpc_2021_05_05.html
Data sourced from Bloomberg, Refinitiv Datastream & Eurizon SLJ Capital Ltd as at 21st May 2021.
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