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  • Emerging Markets Debt Daily

    Is Argentina Affecting Brazil’s Outlook?

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    March 12, 2019

    Brazil’s industrial production disappointed again, raising concerns about negative spillovers from Argentina. Turkey’s financial market regulations cast a shadow over the currency.

    We had mixed feelings about another below-consensus industrial production print in Brazil
    (down by 2.6% year-on-year in January, see chart below). On the one hand, the central bank’s accommodative policy stance and improving manufacturing surveys suggest that we should see some improvements in the coming months. At the same time, we are concerned that a big part of it could be offset by the ongoing weakness in Argentina, which is a major market for Brazil’s manufacturing exports. Today’s print may reinforce the market expectation of additional monetary easing in Brazil (14bps is currently priced in), especially if the inflation outlook remains benign.

    Turkey’s decision that money market funds should transfer at least 50% of their holdings to bank deposits raises additional questions about the country’s policy direction, as well as about potential implications for the currency. Even though the move may benefit banks (at least initially)—and maybe encouraging some of them to increase lending to the real economy (a big “if” in our opinion)—there are legitimate concerns that bank deposits may become even more dollarized, raising the depreciation pressure on the lira and leading to more government intervention/controls to stabilize the situation.

    The U.S. dollar ended up a little bit weaker this morning as mixed capital and durable goods orders gave more reasons to worry about the U.S. growth outlook (compared to tentative signs of sequential improvements in the Eurozone’s industrial production). The fact that the Federal Reserve Bank of Atlanta's closely watched gross domestic product nowcast dropped to mere 0.17% and producer price inflation hit the 20-month low in February did not help either (despite some indications that U.S. investment spending may strengthen going forward).


    Chart at a Glance

    Brazil Industrial Production

    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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