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  • Emerging Markets Debt Daily

    EM Disinflation – Gaining Traction?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    October 08, 2020

    EM downside inflation surprises suggest that some COVID-related distortions might be fading away. The Turkish lira is approaching a psychologically important 8.00/U.S. Dollar threshold.

    Today’s downside inflation surprises in Emerging Markets (EM) are noteworthy because they came from two inflation hotspots – Hungary and Mexico. Services disinflation was the main driver in Hungary, signaling that the COVID-related distortions might be in the way out and that genuine macro factors (like a large output gap) are moving to the forefront. If this is the case, Hungary’s central bank might get more breathing space, after it was forced to tighten last month. Mexico’s situation is a bit different – headline inflation slowed but stayed above the target range in September, and the downside surprise came mostly from non-core items. So, the cautious policy stance remains justified, especially if there are signs of a stronger pickup in domestic activity.

    There is one EM currency everybody is watching rather intently this morning - the Turkish lira. The lira was down by another 73bps vs. U.S. Dollar (as of 10:20am ET, according to Bloomberg LP), which brings it closer to a psychologically important threshold of 8.00/U.S. Dollar. Policy-wise, a move like this would put the central bank under more pressure to act – either in the form of another big rate hike (“backdoor” tightening using the average cost of funding might be less effective), or in the form of direct intervention. In the case of the latter, you can be assured that a specter of capital controls will be back in no time (Turkey’s gross reserves halved since December 2019, and still declining). Enjoy the show!

    Brazil’s speedy recovery narrative got another boost today following a strong retail sales print for August (up by 6.1% year-on-year). With domestic activity stabilizing, the focus is increasingly shifting to the government’s ability to deliver on the fiscal and reform fronts. There are some positive shifts there – a few days ago we wrote about rapprochement between the government and the lower house. Comments by Brazilian officials at the IMF virtual meetings (which we are dutifully attending) show that they are willing to act. But the market needs concrete results, which are not here yet.

    Chart at a Glance: Turkish Lira’s Wild Ride


    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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