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  • Emerging Markets Debt Daily

    Mexico Opts for Prudent Rate Cut

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    September 27, 2019
     

    Mexico continues to cut rates, but chooses to proceed with caution. China stays out of the World Government Bond Index for now.

    Mexico’s central bank lowered its key rate by 25bps, in line with earlier signals and comments. The decision was not unanimous, however, with two members voting for a deeper 50bps cut. The statement was virtually unchanged, retaining its hawkish undertones—which might look inconsistent with the calls for a larger cut but makes a lot of sense when considering sticky core inflation. The latter is the reason why we think the central bank will continue to proceed with caution, switching to a more aggressive mode when the inflation downtrend becomes more established.

    China’s index “accession” process took a little pause today. The Financial Times Stock Exchange Group (FTSE) decided that authorities had to do more work to improve the currency’s accessibility and liquidity before China can become part of the FTSE World Government Bond Index (WGBI)1. This is a setback, but definitely not the end of the world. Authorities continue to liberalize China’s financial markets, and this should include more openness on the exchange rate front as well.

    Ukraine remains at the center of attention these days (no, no, no—we are not talking about The Call). The government’s reform agenda looks very ambitious (land reform, for example), and this makes Ukraine a rising emerging markets (EM) star. Yesterday’s confusion about the new International Monetary Fund (IMF) program appears to have been resolved. Both the Ministry of Finance and the IMF issued statements indicating that the work continues as scheduled, and that the new arrangement is likely to be a 3-year Extended Fund Facility (EFF)2.

    A propos: Continuing the Ukrainian theme, it’s not just the country’s reform agenda that we find exciting. Ukraine’s new cuisine is also seriously impressive. On my last trip to Kiev, I tried blue-and-yellow dumplings (think about the national flag!) and a raspberry liquor dumpling shot. But it was a borscht popsicle - complete with frozen sour cream on top—that sealed Ukraine’s reputation as a new destination for foodies. Have a great weekend!

    FTSE World Government Bond Index (WGBI): The WGBI measures the performance of fixed-rate, local currency, investment-grade sovereign bonds.

    Extended Fund Facility (EFF): The EFF is an International Monetarr Fund lending facility established in 1974 to assist member countries in overcoming balance of payments problems that stem largely from structural problems and require a longer period of adjustment than is possible under a Stand-By Arrangement.

  • 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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