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  • Emerging Markets Debt Daily

    Mexico Inflation Refuses to Subside

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

    Mexico’s upside inflation surprises justify a cautious monetary policy stance. Brazil’s pension reform bill clears the first hurdle in the lower house.

    Sizeable upside surprises in Mexico’s core and headline bi-weekly inflation strongly suggest that policy rate cuts are not coming any time soon
    . Headline inflation accelerated to 4.38% year-on-year, moving away from the central bank’s target range (see chart below) and giving credence to board members’ hawkish stance (Mexico’s real policy rate is about 3.7%). The market continues to price in 39bps of easing in the next 12 months, hoping that the soft growth outlook and decent fiscal performance can soften the policy bias.

    There was a sense of relief among Brazil-watchers yesterday as the crucial pension reform bill cleared its first hurdle in the lower house committee. So, the bill is still on the right track, and the debate now moves to a special committee, where it will reside for several tumultuous months. The key question/concern right now is the extent of potential dilutions and their impact on the expected fiscal savings.

    China’s decision to inject additional liquidity via 1-year medium-term lending facility (in addition to the RMB200B provided on April 17) provided more color on the central bank’s policy intentions, following upside activity surprises. The recent communications from the central bank (PBoC) and the Communist Party’s Politburo raised the possibility of a more measured approach on the monetary front, especially as regards further cuts in bank reserve requirements. However, today’s developments show that authorities are not shying away from other policy instruments, especially those that target structural deficiencies (such as small companies’ access to credit).

    Chart at a Glance

    Mexico Inflation

    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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