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  • Emerging Markets Debt Daily

    Mexico Inflation Leaves Room for Rate Cuts

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 21, 2019
    Mexico’s biweekly inflation continued to ease, giving the central bank room to cut rates. A sharp turn in Argentina’s monetary policy raises concerns about growth and President Mauricio Macri’s re-election prospects.

    Mexico’s latest biweekly inflation should give the central bank some peace of mind regarding a more dovish policy stance. 
    Headline inflation surprised to the downside at 3.89% year-on-year. Core inflation also moved lower in year-on-year terms (to 3.51%), albeit not as fast as expected. The central bank’s minutes showed residual concerns about upside inflation risks, but softening domestic activity questions the need to maintain such a high real policy rate. 

    Argentina’s latest data prints indicate that it is still very much an uphill battle for President Macri and his government in the pre-election months. Even though January’s trade balance posted a surplus (USD372M), it was smaller than expected (USD1.1B), with exports falling on a year-on-year basis (-5%) for the first time since September 2018. The imports dynamics (down by 27% year-on-year) point to the ongoing weakness of investments, which is a bad sign for gross domestic product growth and for Macri’s re-election prospects. Yesterday’s 301bps 7-day Leliqrate hike to address the currency’s weakness points in the same direction. 

    China’s quarterly monetary policy report suggests that its central bank (PBoC) is not in a mood for “bazooka” quantitative easing2 just yet, despite dropping “neutral” from the monetary stance verbiage. “Drip irrigation” stimulus appears to be the preferred way forward, with targeted parameters that include both levels (“reasonably abundant” banking liquidity, “reasonable and stable” M23/aggregate financinggrowth) and prices (“reasonably stable” market interest rates). The next round of Purchasing Managers' Indices will be key to fine-tune the irrigation’s “flow rate”. 

    1Leliq notes are 7-day liquidity bills whose interest rate serves as the benchmark rate in Argentina.
    2Quantitative easing is when a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply.
    3M2 is a broad measure of money supply for the CNY, including all cash in circulation and money held in bank accounts.
    4Aggregate financing is a measure of the volume of financing provided by the domestic financial system to the private sector of the economy during a certain period of time.

    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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