Inflation Surprises Abound

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by: VanEck

Politics continue to affect the price action in Russia, Argentina, and Turkey. Meanwhile, the latest inflation releases in emerging markets produced several surprises that may have policy implications down the road.

In today's big inflation data dump in emerging markets, several releases stood out. A combination of an upside headline inflation surprise (2.1% year-on-year in July) and policy easing in China raised concerns about stronger price pressures in the second half of the year. Mexico's headline inflation accelerated further in July (to 4.81% year-on-year), but core prices look stable (at 3.63%−see chart below), reassuring the market that the central bank is done with rate hikes. In the Czech Republic, the market ignored the expected moderation in headline inflation, focusing on the surprising rebound in core prices and a possibility that the central bank will hike again in September (not currently priced in) instead of waiting until November.

The expected 50bps policy rate hike in the Philippines was accepted by the market with gratitude (the Philippine peso edged stronger after the announcement). However, a big downside surprise in Q2 gross domestic product (GDP) growth (6% year on year vs. 6.6% consensus) raised the question of whether the central bank might be nearing the end of the tightening cycle. The inflation dynamics say "no." Headline Consumer Price Index (CPI) is rapidly approaching 6% (way above the 3% target), and the central bank has just revised its 2018 and 2019 price forecasts up to 4.9% and 3.7%, respectively.

Local politics and geopolitics are having a major impact on asset prices (especially rates and currencies) in Russia, Argentina, and Turkey. The prospect of fresh U.S. sanctions pushed the Russian ruble down by about 350bps and the Turkish lira down by 500bps in the past two days (as of 9:45 a.m. ET, according to Bloomberg). Local rates and sovereign bonds in both countries are also under pressure.

Argentina is being hit by graft allegations against the previous government, with Fitch Ratings warning that the probe is likely to have significant economic implications (weak growth and fiscal slippages come to mind first). However, the agency appears to be less certain about the rating implications at this stage, which is a bit of a relief for the moment.

Chart At a glance

Source: Bloomberg LP

IMPORTANT DEFINITIONS & DISCLOSURES

PMI - Purchasing Managers' Index: economic indicators derived from monthly surveys of private sector companies; 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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