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  • Emerging Markets Debt Daily

    Brazil at Ease with More Rate Cuts

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 01, 2019

    Brazil’s central bank feels comfortable enough with the pension reform outlook to go for a larger than expected rate cut. Manufacturing activity gauges in many emerging markets (EMs) continue to look underwhelming.

    A larger than expected interest rate cut in Brazil (50bps) signals that the central bank is optimistic on social security reform’s approval prospects.
    The statement mentioned the need for further stimulus, as growth is very weak (industrial production contracted by 5.9% year-on-year in June) and there are no inflation pressures on the horizon. There are two full cuts priced in for September and October, but a speedy second vote on pension reform in the lower house (the parliament is back from the recess next week) means that the central bank will ready its scissors more than once.  

    July’s activity surveys (Purchasing Managers Indices (PMIs)) are out this morning, and the overall picture looks underwhelming. The number of countries in the contraction zone still exceeds those in the expansion zone by a wide margin. The deterioration is particularly visible in several Europe, Middle East and Africa (EMEA) economies, due to their exposure to the Eurozone. The Czech manufacturing PMI collapsed to 43.1 in July, leading to a “no need to rate hike now” announcement from the central bank. There are no signs of recovery in Turkey, where the manufacturing gauge slipped to 46.7—a likely excuse for deeper rate cuts. There were some upside surprises—China’s Caixin PMI and South Africa’s unusually strong rebound to 52.1—but today’s releases reinforce the perception that the growth differential between the U.S. and EMs continues to move in the U.S. favor. This is an important fundamental consideration for several asset classes, including EM equities and emerging markets foreign exchange (EM FX).

    A weaker than expected ISM manufacturing survey in the U.S. added to the confusion generated by several references to mid-life crisis mid-cycle adjustment at the U.S. Federal Reserve’s (Fed's) press conference yesterday. The U.S. economy continues to look stronger than most developed markets (DM) peers, but some commentators now see more downside risks to growth. One thing is clear—there are no signs of inflation pressures, and today’s big downside surprise in the prices paid ISM index (down to 45.1) shows this very clearly.

    Chart at a Glance: Brazil Output Struggling to Recover

    Brazil Output Struggling to Recover
    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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