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  • Emerging Markets Debt Daily

    Mexico – Door Wide Open for Rate Cuts

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    September 24, 2019

    Another downside inflation surprise in Mexico should reassure the central bank’s hawks that it is safe to go for another rate cut this week. Both core and headline inflation undershot consensus, with the latter slipping below 3% in year-on-year terms for the first time since late-2017. The market feels emboldened, pricing in nearly three full rate cuts (73bps) in the next three months – with a big move in expectations taking place over the past few days (see chart below).

    The structural reform momentum in Brazil looks strong, with the senate scheduled to vote on social security reform tomorrow and the government expected to submit its tax reform proposal next week. The benign inflation outlook creates an opportune environment for the government to focus on reforms, as it allows the central bank to prop up growth with monetary stimulus. The central bank’s minutes that were released this morning were suitably dovish, and mid-month inflation (broadly in line with consensus at 3.22% year-on-year) signals that there is ample room for more rate cuts.

    An unexpectedly big drop in the U.S. Conference Board Consumer Confidence Index(from 135.1 to 125.1) added to concerns that a growth malaise is spreading from manufacturing to consumption. The release comes on the heels of the disappointing IFOsurvey in Germany (the lowest expectations index since the global financial crisis), reinforcing a feeling that major central banks’ policy efficacy is waning by the day. Paradoxically, the latest policy suggestions from soon-to-be ex-President of the European Central Bank Mario Draghi included more “helicopter money”, as well as Modern Monetary Theory (MMT). But no talk about structural reform. 

    Chart at a Glance:
    Big Move in Mexico’s 3-Month Ahead Rate Expectations

    Source: Bloomberg LP

    1The Conference Board Consumer Confidence Index measures the degree of optimism on the U.S. economy that consumers are expressing through their savings and spending activity.

    2The German IFO survey is a leading indicator for economic activity in Germany.


    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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