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Fed Signal To The Market
Yield curves in key markets bear-flattened (short rates up more than longer ones), following the hawkish U.S. Federal Reserve (Fed) minutes and a huge upside surprise in the ADP employment change (+235K). The Fed’s message to the market is that the rate cuts expectations are too aggressive (Fed Funds Futures price in 35-40bps of easing in 2023), leading to suggestions that U.S. Dollar might be poised to rally if the market expectations for rates move closer to the Fed projections. We keep an eye on the U.S. labor market report tomorrow, and the December inflation print next week for more color.
Brazil Policy Agenda
The policy space debate is very active in emerging markets (EM), especially in countries like Brazil. Brazil’s 10-year bond yield is oscillating around 13%, which means that the real yield adjusted by expected inflation is extremely high. Why the market continues to price in very few rate cuts this year then? The answer lies in the renewed concerns about the policy agenda (reforms rollback, more spending under new administration), which might require either a “warning shot” rate hike from the central bank or the higher-for-longer policy rate. The new cabinet’s inauguration speeches failed to clarify the situation, and even though at some point the market might price in most of the negativity, it does not look like we are there yet.
EM Disinflation
An extra policy complication in EM is that the disinflation process is not just bumpy but that peak inflation is being pushed forward in several countries. We’ve got a serious upside surprise in Colombia this morning, with annual headline inflation rising above 13% and core inflation now approaching 10%. The central bank might need to address this “hiccup” with another 100bps rate hike. Headline inflation in the Philippines rose less than expected, but it is yet to peak (=more tightening). Some members of Mexico’s central bank board suggested that hawkish policy stance should be kept for longer. Even in Thailand – where the disinflation trend is more established – headline inflation reaccelerated in December, signaling that it is premature to talk about rate cuts. Unlike EM peers in other regions, however, Thailand might be uniquely positioned to benefit from China’s reopening and the resumption of tourism inflows (see chart below), which should strengthen the external balance and allow the central bank to proceed with smaller rate hikes. Stay tuned!
Chart at a Glance: China Reopening – A Major Boon for Thailand
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Image and article originally from www.etftrends.com. Read the original article here.