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  • Emerging Markets Debt Daily

    Brazil Central Bank Eyes Fiscal Priorities

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    May 14, 2019

    Fiscal issues are now fundamental for Brazil’s central bank decision-making process. Turkey’s industrial production is bottoming out, but macroeconomic costs raise concerns.

    Fiscal sustainability in Brazil is becoming the key driver of the central bank’s monetary policy decisions
    . The monetary policy minutes released this morning made this very transparent, calling it a “fundamental aspect of the future economic development”. It looks like the central bank will err on the cautious side—meaning no rate cuts—until there is more certainty about the pension reform bill. This is despite a string of negative activity surprises (like today’s extremely weak services growth for March), which should keep inflation pressures under control.

    There is no doubt that Turkey’s industrial production looks better these days—contracting less than expected in March and clearly bottoming out (see chart below). The question is at what price and whether the improvement is sustainable without ongoing fiscal stimulus. As of right now, there are no signs that the pre-election fiscal spree is over for good. The latest headlines suggest that the Treasury wants to borrow an equivalent of USD6.5B from the central bank’s “legal reserve” (a portion of the central bank’s profits) to finance the widening budget hole.    

    The latest trade war snafu continued to generate ripples this morning, with the U.S. Federal Reserve joining the chorus and warning about the higher tariffs’ potential impact on U.S. growth (lower) and inflation (higher). The latest macro releases in the U.S. looked fine—the small business optimism survey for April was stronger than expected (both hiring and compensation plans) and the Atlanta Fed’s wage growth tracker rebounded to 3.6%. However, there are legitimate concerns about a repeat of the Q4 2018 situation, when uncertainty about the U.S.-China trade deal and market volatility took a toll on business confidence.  

    Chart at a Glance

    Turkey Industrial Production

    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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