Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 23, 2020
Mexico’s bi-weekly inflation is back above 3% and the optics justify the central bank’s conservative stance regarding rate cuts. However, it looks like non-energy regulated prices and core food prices were the main drivers. This can be transitory and does not preclude additional policy easing per se, especially if domestic activity continues to surprise to the downside. Still, today’s release might cap expectations of more aggressive easing—beyond 92bps of cuts priced in for the next twelve months.
Argentina’s noisy headlines are causing big intraday moves in asset prices. The latest bunch includes reports that: 1) the Province of Buenos Aires extended the deadline for creditors to accept a delay in the January 26 amortization payment; and 2) the government could use amortization grace periods in its debt restructuring proposal. Regarding the former, there is an argument that the province can get the money to make the payment—so the proposal might be a negotiation tactic. Regarding the latter, market participants might find it incompatible with the fact that the central bank added some USD2B to its international reserves after the elections.
Risky assets—including emerging markets—appear to be at the mercy of global factors this morning. The China virus scare seems to be expanding—despite official reassurances about containment. The Owl (a.k.a. European Central Bank President Christine Lagarde) initially sent the euro stronger (“some signs of moderate increase in underlying inflation”), before pushing it sharply down with a suggestion that climate change should be taken into account in monetary policy decisions. The market’s interpretation was that this means additional monetary stimulus in developed markets. Past experience suggests that the policy space in emerging markets should also expand under this scenario.
IMPORTANT DEFINITIONS & DISCLOSURES
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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