Emerging markets stalling out on inflation and rate hikes

The morning’s mood in both stocks and commodities changed at 5:30am when China raised both its lending rate and deposit rate by 25 bps. The lending rate went to 6.06%, the highest since Nov ’08 and the deposit rate is now at 3%, still well below the CPI rate of around 5%. This hike follows Indonesia last week and is ahead of an expected 25 bps raise in rates on Friday by South Korea. The Kospi index closed at a one month low and India’s Sensex index continued its correction, down by another 1.5% to the lowest since July. Brazil reported a slightly faster than expected inflation rate of 5.99% y/o/y, the most since Nov ’08 and the Bovespa is down almost 6% on the year. Bottom line to the above, higher inflation and central bank interest rate hikes have clearly stalled out the emerging stock market performance. In the US, the NFIB small biz index was about in line at the best since Dec ’07 but plans to hire fell to a 3 mo low.

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