Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    Mexico Edges Closer to Rate Cuts

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

    Mexico’s headline disinflation leaves more room for policy rate cuts. South Africa’s fiscal slippages limit the monetary easing potential despite well-behaved inflation. 

    The deceleration of Mexico’s bi-weekly headline inflation to the lowest level since December 2016
    (3.84% year-on-year) is a sufficient reason for the central bank to consider policy easing, especially against the backdrop of the rapidly deteriorating growth outlook. The market expects the central bank to begin with a modest 25 basis point (bps) cut in the next three months, but then add 100bps or so in the following nine months. The initial cautiousness seems justified, given that core inflation is sticky and services prices continue to edge higher. The release of Q2 real gross domestic product (GDP) number next week might help to determine the timing of the first cut.      

    South Africa’s upside inflation surprise should not be a game-changer for the central bank. Both headline and core prices were higher than expected in June (4.5% and 4.3% year-on-year), but only marginally and both stayed well within the target range of 3-6% (see chart below). In theory, a combination of well-behaved inflation and sluggish growth should leave ample room for the central bank to cut rates – if it had not been for the risk of further fiscal slippages. The latter reflects a low-growth environment and the need to pump more money into the state-owned utility company Eskom. This is the reason why the market expects only one full policy rate cut over the next twelve months.

    The interest in the central bank’s “race to the bottom” spiked this morning after the release of the disastrous manufacturing Purchasing Managers Index (PMI) for the Eurozone/Germany. Even though the European consumer appears to be doing OK, the release fueled the dovish expectations for tomorrow’s European Central Bank (ECB) meeting. The U.S. manufacturing PMI also continued to decline, but the services PMI strengthened unexpectedly. So, it’s kind-of “deuce” as regards composite PMIs. Emerging market central banks are watching the race intently, as it gives many of them extra wiggle room on the policy front.    

    Chart at a Glance: South Africa Inflation Well-Behaved

    South Africa Inflation Well Behaved

    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.