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  • Emerging Markets Debt Daily

    Emerging Markets Scrambling to Cut Rates

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    August 07, 2019

    Emerging markets central banks surprised with additional rate cuts to support domestic demand. Argentina’s feeble industrial production raises concerns about the incumbent’s performance in Sunday’s primaries.

    Central banks in emerging markets appear to be in a hurry to cut rates while the sun Federal Reserve is still “shining”
    . There were two policy surprises this morning. India opted for a larger than expected cut (35bps), with forward guidance emphasizing the need to support aggregate demand (especially against the backdrop of rising tensions with Pakistan—see today’s headlines about the suspension of bilateral trade between the two countries). Thailand delivered an unexpected 25bps policy rate cut, providing a very similar justification (domestic demand). It remains to be seen whether additional policy support would reverse emerging markets growth prospects. But it seems that “the race to the bottom” is now part of emerging markets monetary policy's reality.

    With just a few days before the obligatory primary elections, Argentina’s feeble industrial production and surprisingly weak construction numbers raised concerns about the incumbent’s chances to emerge victorious this weekend. Yearly industrial output contracted by 6.9% and construction activity plunged by 11.8% in June, signaling that the pace of recovery may be slower than expected. There is, of course, a very real possibility that the pre-election jitters dampened business sentiment. It is also worth noting that activity may have been dragged down by the temporary disruption of the power grid, but here we are. The poll margins are very thin and each macro release may push them one way or another. We will be glued to our Bloomberg screens on Sunday, August 11.

    Brazil passed the pension reform bill in the second vote yesterday—with minimal market implications and in line with our views that it was priced to perfection. Amendments should be voted today and then the bill will be sailing to the senate, where it is also expected to get approved without too much noise. The focus now shifts to tax reform—the government keeps itself busy aligning its own draft with the one that currently sits in the lower house.


    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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