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  • Emerging Markets Debt Daily

    Indonesia Powers Ahead with Another Cut

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    August 22, 2019

    Indonesia surprised with a back-to-back policy rate cut. Mexico’s sizable downside inflation surprise opens room for more easing.

    Indonesia’s central bank must be taking its growth concerns very seriously, because it surprised the market with a back-to-back 25 basis point (bps) policy rate cut this morning. The central bank’s governor described the move as a “preemptive” measure to safeguard the growth momentum, and it looks like earlier concerns about the current account deficit had been put on the back burner. A lack of obvious inflation pressures makes the central bank’s job much easier.

    A sizable downside inflation surprise in Mexico strongly suggests that the central bank will soon follow Indonesia’s example and deliver another policy rate cut. Yearly headline inflation dropped sharply from 3.72% to 3.29% in the first two weeks of August. Importantly, core inflation also undershot expectations moderating to 3.77% year-on-year. In light of the underwhelming domestic activity and persistent drumbeat about a dual policy mandate, we think it would be very difficult to argue against additional monetary easing.

    There was a change in developed markets’ macro dynamics this morning. The European activity survey showed some relief in August - albeit not enough to fully exorcize the ghost of recession. Meanwhile, the manufacturing and services Purchasing Managers Indices (PMIs) in the U.S. were noticeably weaker than expected. The key event to watch for further policy direction is Jerome Powell’s presentation at the Jackson Hole conference on Friday. Today’s U.S. PMIs, however, are good examples why many observers continue to doubt the Federal Reserve’s official “mid-cycle adjustment” message.


    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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