MUFG: Lessons from EMs in evaluating peak inflation

May 23, 2022

EM inflation continues to march higher as external factors (especially energy and food commodity prices) exerts upward pressure, with these forces now being supplemented by rising core inflationary dynamics.

Looking ahead, we expect price pressures to intensify, driven primarily by the supply side, as the war in Ukraine and renewed lockdown conditions in Asia are likely to prolong supply chain disruptions. To the extent that inflationary dynamics are proving more global (and more persistent) than anticipated, and with most major DM central banks following EM’s monetary tightening cycles with around a year’s lag, a key conclusion from the EM experience is that the process of inflation peaking requires time and patience.

FX views

EM FX have staged a relief rebound over the past week amidst the broad-based USD sell-off. In particular, the sharp strengthening of the RUB has continued with the USD/RUB breaking below the 60.00-level for the first time in just over four years – RUB appreciation has even prompted speculation that the CBR will resume purchasing FX to prevent the RUB from “uncontrolled strengthening” according to the central bank’s press-service (although the report was quickly denied).

Trading views

Whilst the mood music is resolutely against the EM complex, we are tactically bullish as EM assets in general can rally from a significantly oversold position merely by the fact of the factors driving the negativity getting less bad.

Week in review

Egypt stepped up its hiking pace with a 200bp rise to anchor inflation expectations, whilst South Africa hiked by 50bp with a mild upward inflation revision. Meanwhile, Saudi Arabia’s Q1 2022 fiscal surplus surged to a record and CEE flash Q1 2022 GDP estimates signalled a strong start to the year.

Week ahead and calendar

In a light week ahead, we have the rate decision in Turkey (MUFG: hold at 14.00%).

Forecasts at a glance

We continue to expect the easing of pandemic effects to supporting recoveries, although the going will get tougher in EMs – key risks stem from a continued tightening in global financial conditions and a lower gear in China.

Core indicators

EMs witnessed a rebound in weekly capital flows (USD2.8bn) for the first since early April but this respite will prove short-lived given the risk-off mood.