Global Daily – EM central banks fight back

by: Maritza Cabezas , Arjen van Dijkhuizen , Peter de Bruin , Georgette Boele

140129-Global-Daily-Insight.pdf ()
  • Reserve Bank of India surprised with a rate hike…
  • …and the Central Bank of the Republic of Turkey followed suite
  • …supporting emerging market sentiment
  • US durable orders disappoint, but still in line with a sharp pickup in investment in 2013Q4

The Reserve Bank of India surprised with a rate hike…

The Reserve Bank of India (RBI) hiked the repo rate by 25bp to 8%. The RBI asserted that that the hike would leave the economy on a path of disinflation. The move is in line with the recently appointed committee’s recommendation for the central bank to adopt a new inflation-targeting regime, which is still under review. The committee has recommended a target of below 8% by January 2015 and below 6% by January 2016. Targeting inflation would be a positive move since it will allow the central bank to deal with one goal instead of juggling multiple goals including GDP growth. The RBI announced that its GDP forecast for FY 2015 is 5.5%, which is in line with our forecast. However, we see some downside risks to the outlook, given the impact that inflation targeting could have on short-term growth. In general India’s efforts to reduce imbalances have been received well by financial markets. In contrast to the pressure during the tapering dry run in the summer, the Indian rupee has responded well since the actual tapering announcement.

…and the Central Bank in Turkey followed suite

Meanwhile, with pressures on the lira and capital outflows continuing, the CBRT decided to hike its policy rate by 425 bps to 12%. This was more aggressive than market expectations of 225 bps hike. As a result, the Turkish lira recovered by more than 3%. Up until now the central bank has been very hesitant to hike official policy rates to stem the fall of the lira because of political pressures. Previously, it took several measures to push up interbank rates and also returned to a strategy of FX interventions (which is not a sustainable policy approach).

…supporting emerging market sentiment

The central bank actions helped to support overall sentiment in financial markets and most noticeably in emerging market currencies, though the situation remains fragile. Indeed, the hikes not only supported the Turkish lira and the Indian rupee, but we saw wider moves, with some recovery in the Mexican peso and the South African rand as well. Among the majors, the safe haven currencies, the Japanese yen and the Swiss franc, lost ground across the board. Gold prices also felt gravity again, and so did silver. The sentiment in other commodities and on equity markets was positive, while safe haven bonds lost some of their appeal. The VIX moved lower again after last week’s spike.


US durable goods orders signal Q4 capex acceleration

On the data front, December´s durable goods orders report was disappointing, with orders sliding by 4.3%, following a downwardly revised +2.6% (initially reported at +3.4%) in November. This was well below the consensus forecast of a 1.6% rise. Most of the weakness could be found in the volatile parts of the report, with ex. transportation orders falling by a much more modest 1.6%. Still, core capital goods orders, which tell us something about the future strength of investment in durable equipment, fell by 1.3% in December, while November was revised down from +4.5% to +2.6%. This still left core orders up by 0.9% on an annualised basis in Q4 of last year, though – admittedly – this was softer than what we had been hoping for. That said, we continue to think that investment growth is about to pick up. For a start, core capital orders can be volatile, and the capital goods shipment data were actually much better. Indeed, even though shipments of capital goods fell by 0.2% in December, this followed a 2.3% gain in November. As a result, capital goods shipments were up by 6.5% on an annualised basis in Q4 of last year. This marks the strongest performance since 2012Q1 and suggests that investment in equipment picked up sharply in the final quarter of last year. Moreover, the fundamentals for investment are bright. Profit margins are at historically high levels, corporate balance sheets are strong, while other components of demand are firming. Against this backdrop, investment should flourish.