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  • Emerging Markets Debt Daily

    Mexico Central Bank Resolve Remains Strong

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    November 29, 2018

    Mexico’s central bank maintains its hawkish policy stance in the face of policy uncertainty and potential fiscal slippages. Indonesia’s central bank acknowledged that preemptive rate hikes leave room for the currency to appreciate.

    Mexico’s central bank inflation report and monetary policy minutes were decidedly hawkish. In our view, this is the right approach against the backdrop of policy uncertainty and a very real risk of fiscal slippage under the new administration. The minutes’ references to a “markedly uncertain” 2019 inflation outlook and one board member voting for a 50bps hike echoed the quarterly inflation report’s higher Consumer Price Index (CPI) projection, despite the lower gross domestic product (GDP) growth forecast. As of this morning, the market expects another policy rate hike in Mexico in the next three months.

    There was a nice rally in Indonesia’s rupiah this morning following the central bank’s (BI) announcement that it will allow the currency to strengthen in line with fundamentals against the U.S. dollar. The BI has raised its policy rate by 175bps since May – most of it preemptively – reassuring the market with its (mostly) orthodox approach. Looking forward, one area of concern is that the rupiah’s newly-found strength will interfere with the BI’s plans to reduce the current account’s deficit, which widened to 2.77% of GDP in Q3 vs. 1.33% of GDP in Q3-2017.

    Stronger than expected personal income and spending prints in the U.S. helped the U.S. dollar to retrace most of the morning’s losses. The downside core inflation (PCE core) surprise (see chart below) had only a limited impact on the market, perhaps because the U.S. had an inflation “twin” across the pond: Germany’s preliminary November CPI also undershot consensus, easing to 2.3% year-on-year. The market continued to reassess the U.S. Federal Reserve’s tightening plans in the wake of Chairman Jerome Powell’s speech yesterday. The December hike is still priced in with an 82.3% implied probability, but the amount of subsequent tightening was reduced to 21bps.


    Chart at a Glance

    U.S. Personal Consumption Expenditure Core

    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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