Emerging Markets Insight

The Big Data Divergence of
Monetary Policy

Apr 26, 2018
By Gerardo Rodriguez, Jeff Shen, PhD, Stephanie Lee

Emerging market highlights

  • Although hawkish chatter has intensified for the Fed, EM central banks are still in a dovish stance.
  • EM economies are at an earlier stage in the economic cycle, which should be supportive for equity markets.

Market overview

As the Fed continues its march towards higher policy rates financial markets keep wondering if the hiking cycle could inflict damage to the bright prospects of EM equities. We rely on Big Data techniques to provide a hint.

The global economy has evolved from an acceleration of growth towards growth stabilization at above trend levels. There has not been an episode since the global financial crisis where different regions have experienced the type of synchronized growth that we are seeing right now. Notwithstanding the recent volatility, global equity markets have experienced strong performance during the past couple of years.

The positive global economic environment has also provided support to commodity prices and other assets, erasing the fears of deflation that were present not long ago. All of this has allowed the Fed and other central banks to start their march to monetary policy normalization, by withdrawing gradually the extraordinary support that they have provided over the past few years.

But it appears that now some market participants are wondering if the Fed tightening could inflict pain in financial markets, especially when it comes to EM. We used text analysis to test sentiment around the hawkishness of monetary policy of the Fed against other relevant central banks in developed and emerging economies. By processing more than 5,000 broker research reports daily we measure the chatter about policy in different countries to assess the hawkishness or dovishness in analyst’s language when they describe monetary policy in each country.

We find attention around tightening policy the highest in the U.S. (see graph below), but more importantly we see a clear divergence between EM and DM countries. We have neither seen relevant actions from EM central banks following the Fed into a hiking cycle, nor significant emergence of chatter around raising rates has occurred. This is a sign that, as opposed to the U.S., emerging economies are at a relatively early stage of the economic cycle and that there is room to support the expansion by lowering policy rates further, if needed. This is one more reason we like EM equities as an asset class.

Monetary policy sentiment scores

Monetary policy sentiment scores

Source: BlackRock, Thompson Reuters, as of March 2018.

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