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  • Emerging Markets Debt Daily

    Argentina’s Contraction Deepens

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 06, 2019

    A massive decline in Argentina’s industrial production draws attention to risks associated with the presidential election’s outcome. Central Europe’s data and news flows remain dovish, strengthening the case for keeping policy rates on hold.

    Argentina’s industrial production continues to feel the pressure from tighter fiscal and monetary policies. The December decline was massive – down by 14.7% year-on-year – and broad-based. Looking forward, one key risk is that sticky inflation expectations may affect the pace of policy easing, delaying economic rebound, which is currently expected to begin sometimes in late Q2/Q3. The timing of the rebound will be crucial for President Mauricio Macri’s administration and its ability to remain in power after this year’s presidential election.

    There are more dovish signals in Central Europe this morning. Poland’s central bank (NBP) kept its policy rate unchanged at 1.5%, commenting on softer domestic and global activity and non-existent inflation pressures, and signaling that it intends to stay on hold in the foreseeable future. In the Czech Republic, industrial production growth surprised meaningfully to the downside in December, further weakening the case for additional policy tightening. The market agrees, pricing in no rate hikes in 2019.

    Russia’s inflation accelerated in January, reflecting the higher value-added tax rate (see chart below). However, the increase was smaller than expected (to 5% year-on-year) – especially in core inflation, which undershot expectations by a wide margin (4.1% year-on-year). This strengthens the case for the central bank to stay on hold this coming Friday. Looking forward, the market remains alert, pricing in nearly two full hikes in the next 3-6 months. One external risk factor for the central bank is the possibility of new sanctions against Russia (with the timing potentially linked to the Ukrainian presidential elections).


    Chart at a Glance

    Russia Inflation

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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