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  • Emerging Markets Debt Daily

    Mexico Policy Stance Softens

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    June 28, 2019

    Mexico’s central bank statement looked more dovish than expected, supporting the market expectation of policy easing. The renewed deterioration of Turkey’s trade balance slowed in May.

    Mexico’s central bank
    (Banxico) made a notable dovish turn at its last policy meeting. Even though the benchmark rate was kept unchanged at 8.25%, the statement referenced the deteriorating growth outlook and cited it as a downside risk for inflation. The currency’s appreciation that may come on the heels of the U.S. Federal Reserve rate cut should act in the same direction. The market currently prices in a lot of easing (124bps) for the next 12 months. However, the existing risks and uncertainties (tariffs, energy prices, public finances) suggest that the Banxico will proceed with caution.

    The renewed deterioration of Turkey’s trade balance slowed in May, with the deficit narrowing to USD1.84B. Imports remained subdued, while exports accelerated quite a bit (see chart below)—a welcome development if sustained (meaning that exporters can benefit from the weaker currency). Turkey’s trade and current account balances continue to look stronger than in 2017 (the current account gap is expected to shrink to 1.3% of gross domestic product in 2019, according to the Bloomberg consensus forecast). But large financial outflows may prevent the currency from reaping the full benefit of the external adjustment.

    An upside surprise in Poland’s inflation is unlikely to affect the central bank’s neutral policy stance for now. Yearly headline inflation accelerated to 2.6% in June, rising above the target band’s midpoint. However, it looks like the bulk of the increase was due to higher food prices, and monetary authorities tend to treat such price movements as transitory. Looking forward, the core inflation dynamics remain key—and many commentators agree that it points to the above-potential growth. Another important consideration is the impact of the pre-election fiscal stimulus, as it mostly targets consumption.

    Chart at a Glance

    Turkey Exports and Imports Growth

    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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