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  • Emerging Markets Debt Daily

    Brazil: How to Lose Reform Momentum in 10 Days

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 19, 2019

    The market remains disappointed by Brazil’s failure to follow through on key structural issues. Argentina’s new cabinet is expected to have centrist candidates in key positions.

    So much for positive momentum in Brazil. The currency is still trading near historical lows this morning as President Jair Bolsonaro’s administration failed to follow through on key structural issues, including the pre-salt oil rights auction and a coherent pro-growth reform agenda. The president’s decision to create a new political party only added to the confusion. The local press is now saying that the administrative reform bill will be postponed, while the parliament’s speaker, Rodrigo Maia, noted that the government’s proposal to submit tax reform in four separate parts “condemns it to failure’’.

    It’s reassuring to know that Argentina’s new cabinet is “almost defined”, according to President-elect Alberto Fernandez. Fernandez did not mention any names (naturally), but the press is abuzz with stories and possible lineups, many of which include centrist economist Guillermo Nielsen, who renegotiated Argentina’s debt with the IMF and private creditors in the early 2000s, and whose appointment would be well received by the market. Nielsen’s earlier remarks suggest that he would be pushing for a speedy resolution, encouraging holders of local debt to roll it over, in order to keep the peso liquidity—as well as the parallel exchange rate and inflation expectations—under control.

    A big drop in the U.S. gross domestic product (GDP) growth estimate produced by the Federal Reserve Bank of Atlanta (see chart below; the New York Fed’s Q4 nowcast looks just as bad), helps to explain why yesterday’s meeting between Fed Chair Jerome Powell and President Trump received so much attention—especially after Trump’s tweet that a strong dollar is hurting manufacturers and growth. The market, however, is not in a hurry to adjust its policy rate expectations for the U.S. Growth nowcasts tend to move a lot, as high-frequency data releases are incorporated when they become available.

    Chart at a Glance: U.S. GDP Growth Forecasts – Down but Not Yet Out

    U.S. GDP Growth Forecasts – Down but Not Yet Out

    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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