Inflation in the US: how the data affects the local investment scenario

And Estrada explains that the great problem for investors is that, to achieve this objective, you can use different monetary policy tools, one of which is to raise interest rates, which, as detailed, is currently located at 4.75%, well above 0 25% from a few years ago.

Effects of inflation on the rate and on the investor

Why is that a problem? It happens that “this increase in the cost of money makes the capital more expensive and it becomes more onerous to ask for a credit for a company and for families, generating a cooling in the economy”, details Estrada.

And, on the other hand, he points out that, having a high inflationinvestors begin to demand higher rates of returns in Treasury securities, which causes the government bond yields in the United States rise, unleashing a ‘flight to quality’ effect, that is, capital outflow from emerging countries in search of safe capital.

Inflation in the US: this is how it affects the Argentine investor

Now, how to interpret this tendency from the point of view of the Argentine investor? Estrada states that an element to observe is that “this can continue to generate increased pressure on the exchange rate and on the local bonds, due to less capital flow”. Therefore, it will be necessary to be attentive to the next meetings and speech of the authorities of the Federal Reserve to see what policy they will follow.

In the same sense, Juan Ignacio Alra, economist and Portfolio Manager of the Southern Trust, indicates that, “when one looks at inflation in the United States in detail, one sees a drop in energy prices while the prices of services are far from have slowed down” and ensures that other data show that the US economy continues to strengthen such as unemployment that continues to be lower than what analysts expect.

Faced with this disparate scenario, Alra points out that “we, as an emerging country, are very attentive to how Jerome Powell, president of the FED, is going to continue after the inflation data because he maintains that “the rise in rates affects us directly.”

How? Well, it suggests that it can have two adverse effects:

• on the one hand, one dollar appreciation that would affect the price of imports and,
• in turn, could make the commodities have falls in their prices.

“We depend on a large scale on the agricultural exportsa, which could be affected and this would have repercussions on the balance of payments, making it more difficult to comply with the goals with the International Monetary Fund (IMF)he warns. Clearly, this would have a negative effect on Argentina’s public financial instruments, which would adversely affect the local investment climate.

And, on the other hand, he points out that if the FED decided to continue increasing ratecould affect the bonds of emerging countries because it would make international capital prefer safer assets and exit their positions, generating the aforementioned flight to quality effect from emerging to central countries.

In that scenario, “we could get to see the Argentine bonds having a strong fall as a consequence of a constant rate hike by the FED”, warns Alra.

The watchful eye on the FED and Jerome Powell

In the words of the director of the consultancy Inviu and economist, Diego Martínez Burzaco, “the market is digesting the inflation data and it will begin to align with what Powell said: that high rates are going to stay at that level for a long time until inflation returns to its place.

The expert anticipates that this generates that, in the short term, there may be challenges for emerging marketsincluding Argentina, but reassures by pointing out that “if a deep recession is avoided, emerging assets have attractive valuations adjusted for the level of risk to attract capital.”

Thus, as Alra puts it, everything indicates that, given the scenario of a possible rate hike by the FED as a consequence of the inflation data, from Argentina, “investors should remain cautious about the future of a market that has not yet decided if the objective of lowering inflation is being achieved or if this is just the beginning of a more difficult path”.

Although everything would indicate that the FED is more inclined towards this second look, which would anticipate a more complex scenario for investors in emerging countries going forward.