In today’s briefing:
- What to Expect of EM Rates When Expecting US Rates to Stay Volatile?
- EA: Core Trend Ripped Above 2%
What to Expect of EM Rates When Expecting US Rates to Stay Volatile?
- The risk of US yields continuing to rise is high especially with inflation not having peaked yet, the Fed potentially reducing its balance sheet, and real rates still negative.
- The high volatility in US rates does not bode well for EM rates due to their high correlation even though EM local debt is overall cheap based on most metrics.
- Until the volatility in US rates subsides, it is best to focus on cross-country and curve trades in EM, with my preference for curve steepening trades in several countries.
EA: Core Trend Ripped Above 2%
- EA HICP inflation was confirmed at 5.0% y-o-y for Dec-21, while the ex-tobacco index printed at 109.97 (HTRO: 109.98).
- A leg down in Jan-22 should start a headline trend. The step-up in the core inflation impulse is more critical for us.
- It implies upside and, for the first time since the sovereign debt crisis, it shows inflation settling near 2%.
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