Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 22, 2020
Brazil’s central bank intends to keep the policy rate low as long as certain conditions are met. South Africa’s leading indicator rebounds, but high unemployment poses a major risk for recovery.
Brazil’s recovery is well on its way, but it is not yet complete, according to the central bank’s minutes. And this is the reason why the monetary stimulus is here to stay – for as long ascertain conditions are met. These conditions include below-target inflation projections and expectations, and the unchanged fiscal regime. If this is the case, “would not raise the interest rate but could reduce it”. This assessment goes against the current market expectation of a 22bps increase in the benchmark policy rate in the next three months (and 81bps of cumulative tightening in the next six months).
South Africa’s assets had a pretty wild ride so far in September, driven by alternating headlines about global risks and local developments (a hawkish surprise from the super-credible central bank, a new restructuring plan for the state-owned utility, and the gradual removal of COVID restrictions). Today’s stronger than expected leading indicator for July (and an upward revision of June’s print) confirms that the worst growth numbers are behind us. The pace of the recovery, however, is still a big unknown. One factor that can drag it down is the dreaded increase in the unemployment rate, which is expected to jump to 35% (!) in Q2 – the highest among major emerging markets (EM).
Hungary’s central bank (NBH) stayed put this morning, but one could clearly detect hawkish undertones in subsequent comments. Deputy Governor emphasized that it is too early to relax on inflation, which is hovering just under 4% year-on-year due to the impact of the COVID-related supply-demand mismatch and the weaker currency. The market thinks that this will lead to a rate hike in the next six month. However, a high base effect and fewer COVID-linked price distortions should help to guide inflation lower – not just in Hungary but elsewhere in Central Europe.
IMPORTANT DEFINITIONS & DISCLOSURES
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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