(Bloomberg) – Global bond investors are on the lookout for emerging markets that are ahead of inflation.

TS Lombard recommends funds buy local debt from Brazil, where a third interest rate hike is expected at the officials meeting on Wednesday. PineBridge Investments praised Bank of Russia Governor Elvira Nabiullina’s harsh inflation talk and predicted gains for the country’s longer-dated bonds.

Central bankers across the developing world are walking a fine line in managing price pressures in places where hyperinflation scars are fresh and also feeding economies still struggling with the coronavirus pandemic.

While the trend is far from consistent, rising commodity prices and undervalued exchange rates are raising the temperature across the board, with attention this week shifting to Argentina’s inflation data. , India and Poland.

“Investors will ultimately favor countries where central banks are able to keep inflation ahead,” said Jon Harrison, London managing director of emerging markets macro strategy at TS Lombard. “It is essential that central banks react proactively.

So far, Brazil and Russia stand out, he said.

Central bank chief Roberto Campos Neto has said he is ready to do whatever is necessary to keep Brazil inflation within target, and economists are unanimous in predicting another hike this week for Latin America’s largest economy.

The country’s bonds have returned around 10% since the first rate hike in March, while the currency has appreciated 9.2% to lead emerging market gains over this period. In contrast, an indicator of the local currency debt of developing countries has increased by less than 1% this year.

Loomis Sayles & Co. is another fan of Brazilian bonds and says the currency’s continued strength should help contain the pace of price growth.

“The appreciation limits the number of hikes because it lowers the risk of pass-through inflation,” said Edgardo Sternberg, co-manager of emerging market debt portfolios in Boston at Loomis Sayles, which oversees $ 346 billion. The company favors the shorter end of the yield curve and prefers not to hedge against the dollar, he said.

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Elsewhere, hawkish comments from the head of Russia’s central bank are likely to support the ruble, which could help stabilize inflation expectations, said Anders Faergemann, portfolio manager at PineBridge Investments in London.

A fourth rate hike is “very likely” in July, Nabiullina said in an online briefing Friday after raising the key rate by half a percentage point.

Risk of undocking

On the other end of the spectrum, investors avoid markets where policymakers allow price pressures to escalate. Poland and Hungary, where bond yields are more modest, call for particular caution.

“We are cautious in low yielding markets with a high correlation to base rates and where inflation risks becoming ‘unanchored’ are of greatest concern,” said Mary-Therese Barton, Head of Markets Debt. emerging markets in London at Pictet Asset Management. Ltd.

Hungary’s annual consumer price index climbed to 5.1% in April and May, the highest since 2012 and the fastest pace in the European Union, while the level in Poland climbed at 4.8%, the fastest in a decade.

The overall consumer price index is also above target in countries like Turkey, Mexico, India, the Philippines and South Korea, HSBC Holdings Plc said in a research note this month. -this.

Regardless of the central bank’s efforts to contain inflation, any external inflationary shock emanating from the United States would thwart even the most aggressive stance.

A rapid rise in US rates “can have negative repercussions,” said Michel Vernier, head of fixed income at Barclays Private Bank in London. “We saw it during the taper tantrum of 2013, when long-term interest rate spikes in the United States triggered large capital outflows into emerging markets.”

Walk or hold

The Bank of Indonesia’s rate decision will be the center of attention on Thursday as traders see how the central bank balances its two goals of monetary stability and supporting growth. Policymakers should keep the seven-day repo rate stable at 3.5%

The central bank has cut the policy rate by 150 basis points since the pandemic last year. Brazil’s central bank is due to meet on Wednesday, likely following through on plans to raise the Selic rate to its pre-pandemic level. The real was the worst performing currency in Latin America last week. A reading of Brazil’s economic activity index for April on Monday is likely to reflect a recovery amid emergency cash distributions and loosened restrictions on Thursday As the economic case for a rate cut is weak, with with inflation set to rise again and the currency vulnerable, the central bank “may adjust the language of its statement to lay the groundwork for possible easing later in the summer,” Bloomberg Economics said. in a report, Governor Sahap Kavcioglu sought to allay fears of premature easing after President Recep Tayyip Erdogan renewed his calls for lower borrowing, making vague reference to the summer months as a target date. Ukraine’s central bank could raise its policy rate by 50 basis points to 8% on the same day after inflation hit a two-year high, the hryvnia, one of the region’s best-performing currencies this year, may help relieve price pressure in coming months Policymakers in Egypt will also likely leave policy rate unchanged on Thursday

Biden talks

On Monday, President Joe Biden will meet with Turkish President Erdogan in Brussels, where their talks will focus on military issues, as NATO allies hold a summit. Biden will also meet Russian President Vladimir Putin in Geneva on Wednesday – their first face-to-face meeting since Biden took office in January. The summit is expected to be tense, as Washington and Moscow disagree on a number of issues, including cybersecurity, Ukraine and the Kremlin’s persecution of Putin’s political opponents.

What else to watch

The People’s Bank of China is expected to refrain from increasing cash injections as 200 billion yuan ($ 31 billion) in one-year political loans mature on Tuesday. Eight in 10 traders and analysts polled by Bloomberg expect cash flow without injecting additional funds This signal from the central bank will come as banking system liquidity is expected to tighten this month as local governments prepare to selling more debt and with banks accumulating liquidity for quarter-end regulatory checks, China will announce data on Wednesday that may show the economy continued to accelerate in May. Industrial production growth has likely held steady, although retail sales likely grew at a slower pace than the month before, analysts estimate. economists surveyed by Bloomberg. While this is above the central bank’s median target of 4%, it is unlikely to elicit a hawkish response as policymakers focus on supporting the economic recovery, according to Bloomberg Economics. Indonesia and India will release trade figures for May on Tuesday. be the center of attention after the country’s central bank chief dispelled any remaining doubts about his promise to keep interest rates at record highs, hammering home the message that the pressure on prices is temporary The zloty has posted its first weekly decline since April against the euro days until Friday Investors will watch El Salvador bonds after the country became the first in the world to officially make Bitcoin legal tender Colombian retail sales data for April, scheduled for Tuesday, will likely show a significant jump from the previous year, according to Bloomberg Economics. April’s industrial production figures on the same day are also likely to mark an annual increase. On Friday, investors will look at an April economic activity reading for a strong advance from the previous year. Peru is expected to release a reading of its April economic activity index on Tuesday, which Bloomberg Economics expects to jump 60.3% from the previous year.

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