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    Mexico Inflation – Green Light For More Rate Cuts

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 09, 2020

    Mexico’s lower than expected inflation allows to extend the central bank’s easing cycle. Turkey signed a deal to settle local bonds on Euroclear.

    Mexico’s latest inflation prints give the central bank room to extend its easing cycle. Both headline and core inflation rose less than expected in May due to the reversion of food prices in the second half of the month and a drop in non-food prices (possibly due to COVID-related discounts). As a result, headline inflation stayed in the lower part of the target band (2-4%) – so the market expectation of 84bps of rate cuts in the next three months looks quite reasonable. Mexico still has one of the highest real policy rates among emerging markets (see chart below), and the central bank can cut more without undermining the fundamental support for the currency.

    After several years of negotiations, Turkey finally signed a deal that allows to settle local bonds on Euroclear. This is, undoubtedly, a positive development, but it draws even more attention to the country’s sub-optimal policy mix. A combination of surging domestic credit, massive rate cuts, and frequent currency interventions is particularly unfortunate. It slowed external adjustment (current account), the central bank wasted its international reserves, and the currency still underperformed most of its peers during the COVID crisis.

    In a surprising move, Argentina’s President Alberto Fernandez announced that the government will be taking over the country’s leading agro-exporter, Vicentin, citing the need to preserve food sovereignty. The company filed for bankruptcy several months ago and owes a lot of money to state-owned Banco Nacion, but apparently it was not notified about the government’s intentions. Many commentators believe that authorities will use Vicentin to channel more U.S. Dollars to the foreign exchange market. The move also raises a question mark about the balance of power within the administration – especially the role played by Vice President (and former President) Cristina Kirchner.

    Chart at a Glance: Mexico Inflation Rose Less Than Expected

    Chart at a Glance: Mexico Inflation Rose Less Than Expected

    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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