EMERGING MARKETS-Stocks jump on U.S. inflation relief ahead of Fed rate decision

Emerging market stocks jumped 1% on Wednesday on relief over cooling U.S. inflation, while currencies made cautious gains ahead of the U.S. Federal Reserve's policy decision later in the day. Asian markets rallied on hopes the Fed would slow its pace of interest rate hikes after data on Tuesday showed U.S. inflation cooled more than expected in November.

Emerging market stocks jumped 1% on Wednesday on relief over cooling U.S. inflation, while currencies made cautious gains ahead of the U.S. Federal Reserve's policy decision later in the day.

Asian markets rallied on hopes the Fed would slow its pace of interest rate hikes after data on Tuesday showed U.S. inflation cooled more than expected in November. Some gains outside Asia also helped the broader emerging markets index . Among currencies, South Africa's rand extended Tuesday's strong gains, up 0.7% on political relief after the parliament voted to stop an impeachment process from being launched against President Cyril Ramaphosa.

Data on Wednesday showed South Africa's headline consumer inflation slowed to a less-than-expected 7.4% year on year in November from 7.6% in October. "The figures will provide room for the Reserve Bank (of South Africa) to ease off the monetary brakes but it will be some time before it will feel it has tamed the "inflation monster"," said Jason Tuvey, senior EM economist At Capital Economics.

All eyes are now on the Fed's policy decision due at 2pm ET. While a 50-basis-point increase to a range of 4.25%-4.5% is almost fully priced in, inventors will be looking for clues on the future pace of hikes as well as commentary on the economy. While traders now bet the Fed could stop short of 5% by March next year, analysts widely expect it to stay restrictive for longer to tame inflation, even at the risk of a recession.

Higher borrowing costs in the United States have previously caused a handful of crises in emerging markets. This time around, several emerging market central banks went early and big with interest rate hikes. However, as major central banks continue on a hawkish path, EM central bankers may have to think twice about winding up their policy tightening cycles to the detriment of their economies.

In Czech Republic, a further interest rate hike cannot be excluded and a vote on cutting rates is not on the table at the moment, central banker Karina Kubelkova was quoted as saying on Wednesday. So far this year, EM stocks are down around 20% and on course for their worst year since 2008, while currencies are on course for their steepest fall since 2015. For GRAPHIC on emerging market FX performance in 2022, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2022, see https://tmsnrt.rs/2OusNdX

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