Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 12, 2020
China’s disinflation intensified in April, opening room for more policy easing. Mexico’s industrial production weakened further, highlighting structural issues and justifying more rate cuts.
China’s inflation moderated further in April, freeing more policy space for monetary easing. Disinflation was broad-based – affecting both food and non-food prices (see chart below). Producer prices moved deeper into negative territory (-3.1% year-on-year), reflecting lower global commodity prices/soft domestic demand and raising concerns about industrial profitability. With headline inflation getting closer to the 3% target, the central bank should feel more at ease (no pun intended) to introduce additional monetary stimulus in the coming weeks.
Mexico’s industrial production (IP) dropped by 4.91% year-on-year in March. The number looked bad, and it’s tempting to blame it on the coronavirus. But this is only one part of the story. The problem is that Mexico’s industrial sector entered the COVID crisis in a weakened condition, contracting non-stop for the past twelve months (17 months if we include a zero growth rate in February 2019). Mexico’s issues are structural, but there is understandably little appetite (or policy space) to deal with them right now. Monetary easing is one of the policy avenues that is still open, and the market is justified in its expectations of a 50bps rate cut later this week.
Brazil’s monetary policy minutes1 confirmed that the central bank stands ready for more policy support. There was a reference to policy gradualism – in a context of potential financial instability, fiscal uncertainty, and a higher risk premium in emerging markets (EM). Nevertheless, the board concluded that recessionary and deflationary forces prevail and unlikely to disappear any time soon. In fact, board members think that inflation expectations may be too low and no longer in line with the inflation target. Hence, the central bank is likely to deliver another sizable rate cut at its next meeting.
Chart at a Glance: China - Broad-Based Disinflation
Source: Bloomberg LP
1Monetary Policy Minutes– The minutes of the Monetary Policy Committee’s meetings present the Committee’s analysis of recent economic developments, the prospects for the Brazilian and global economies, and related balance of risks.
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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