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    Mexico Inflation Sets Stage for Rate Cuts

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 09, 2019

    Mexico’s inflation hit the mid-target point, supporting additional rate cuts down the road. South Africa released a proposal for state-run utility's bailout funds, with a clearer path towards the company’s unbundling.

    Mexico’s headline inflation moderated further in September, finally reaching the central bank’s midpoint target of 3% (see chart below). Even though core prices remain sticky, the overall dynamics improved, allowing the central bank to continue cutting rates, especially if domestic demand remains weak. The market currently prices in two full cuts for the rest of the year—tomorrow’s monetary policy minutes should give more information about how the central bank sees the world these days.

    South Africa’s latest proposal on bailout funds for the state-run utility Eskom had some positives, albeit the market is expecting something more comprehensive—especially regarding the operational side. We liked the fact that the proposal calls for separate financials for generation, distribution and transmission starting from March 2020, which, in theory, should speed up splitting the company into separate business units. The white paper on Eskom’s restructuring is expected to be released in about two weeks—we should get more details on the unbundling process then.

    Brazil’s macro narrative is moving in the right direction. We’ve got another very positive inflation print this morning, with yearly headline prices moderating more than expected in September (to 2.89%) and supporting the market expectation of 72bps of rate cuts in the next three months. There were several upside domestic activity surprises and growth is expected to benefit from the pro-growth reform agenda (tax reform). The inflows bonanza time is getting nearer, following an agreement between the lower house and the senate on the distribution of funds from the pre-saltauction. In addition, the agreement clears the way for the final approval of the pension reform bill in the upper house on October 22.

    Chart at a Glance: Mexico Inflation Reaches Mid-Point Target

    Mexican Inflation Reaches Mid-Point Target

    Source: Bloomberg LP

    1 Brazil's pre-salt oil region is an oil-rich offshore reserve found below layer of salt 2,000m thick.


    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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