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  • Emerging Markets Debt Daily

    EM Central Banks Not Distracted by Dovish Fed

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    June 20, 2019

    Emerging markets central banks are keeping their eyes on local fundamentals, despite a dovish signal from the U.S. Federal Reserve (Fed). Argentina’s economic growth is bottoming out, improving President Mauricio Macri’s reelection chances.

    We find it reassuring that emerging markets central banks continue to focus on domestic factors rather than blindly following the Fed's dovish signal
    . Brazil, Indonesia and the Philippines chose to stay on hold yesterday, with the Philippines going against the consensus call for a 25bps rate cut. In Brazil, the central bank is waiting for the lower house’s approval of the pension reform bill, which should improve the long-term fiscal trajectory. Indonesia’s cautious approach reflects the government’s renewed infrastructure push and its potential negative impact on the current account. The Philippine central bank decided to take a “prudent pause” in order to make sure that the disinflation trend is solid. The only clear-cut dovish call came from Turkey, where President Recep Tayyip Erdogan “suggested” that the current interest rate policy should be reversed. The timing of the comment, however, was very astute—the negative market reaction lasted for 1.5 seconds or so before the Fed-led global rally (most likely aided by state banks’ currency interventions) pushed the lira back into the black.

    It’s a rating war in South Africa! Following a fairly “soothing” Moody’s report a few days ago, Fitch came out this morning blasting the country’s “very weak growth” and “stretched levels of public finances”, which will be “very hard to stabilize”. The agency is also doubtful that the government will be able to implement an aggressive reform program, despite obvious improvements in the cabinet’s lineup. By contrast, Moody’s believes the new government will be able to put forward policies that would allow it to tackle these issues. Moody’s also pointed to several insulating factors, including a favorable government debt structure and a large pool of domestic investors.  

    The Argentine economy continued to shrink in Q1, but there are signs that it is finally bottoming out (see chart below). The pace of real gross domestic product contraction slowed to -5.8% year-on-year, driven by investments and private consumption. The improvement in real salaries should provide some support for growth in Q2 (provided that yearly inflation starts to moderate). The government also plans to introduce several fiscal programs to boost incomes and credit going into the elections, which can help growth at the margin. Maintaining a positive growth and inflation dynamics is a key factor that will determine President Macri’s chances of being reelected later this year.

    Chart at a Glance

    Argentina Real GDP

    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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