Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 24, 2020
Mexico’s headline inflation hit the top of the target range, reducing room for additional rate cuts. Fitch revised Turkey’s outlook to “negative”, citing policy credibility and the loss of reserves.
Mexico’s inflation problem refuses to go away. The latest bi-weekly numbers (both core and headline) were once again higher than expected, with headline inflation hitting the top of the central bank’s target range (2-4%) and core inflation not far behind (see chart below). Supply shocks are still the main drivers—and they may persist for a while as the COVID-related restrictions are lifted. The market now believes there is room only for one more moderate rate cut in the next 12 months.
Fitch continues to rate Turkey one notch higher than Moody’s and S&P, but its patience is wearing thin. The rating agency just revised the country’s outlook to negative, citing concerns about monetary policy’s credibility and the waste of international reserves (down by 44% so far this year—mostly due to currency interventions). The central bank is under pressure to avoid rate hikes—the consensus view is that it will continue “backdoor” tightening by gradually moving its average cost of funding higher. The latter did not do much for the Turkish lira this morning—the currency continued to weaken against the U.S. dollar.
The China recovery narrative is approaching the next important checkpoint—the official activity gauges (PMIs) should be released on Sunday. In the meantime, the central bank (PBoC) continues its policy fine-tuning to prop up growth but avoid asset bubbles. The latest installment includes the PBoC’s call on local banks to use financial technologies and new products to support small companies (“blunt” liquidity injections do not always reach intended recipients). As regards bubbles’ containment, the PBoC just issued a new set of funding rules for real estate companies, as the sector is recovering at a brisk pace.
Chart at a Glance: Mexico COVID Inflation Pressures – No Respite Yet
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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