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  • Emerging Markets Debt Daily

    Mexico’s Investments – Case for More Rate Cuts

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 07, 2019

    A deepening contraction in Mexico’s investments puts more pressure on the central bank to cut rates. China’s international reserves continue to float about USD3T, as authorities let the currency absorb more external shocks.  

    The outlook for Mexico’s gross fixed investments remains gloomy, as the yearly contraction deepened to -9.16% in July (seasonally-adjusted terms, see chart below). One of the biggest declines was in machinery and equipment (-12.8% year-on-year), which does not bode well for near-term domestic economic activity. Today’s release increases pressure on the central bank “to do something”, especially as inflation pressures appear to be subsiding, private consumption remains weak and there are constraints on the public sector investments. The market currently prices in 108bps of rate cuts for the next six months.

    China’s international reserves continue to float above the psychologically important USD3T mark. There was another miniscule decline in September—to USD3.092T (a tad lower than expected)—but authorities managed to maintain an overall sense of stability, aided by tight capital controls among other things. Structurally, one development that stands out is China’s renewed interest in physical gold—the central bank added around 6 tons to its holdings in September and about 100 tons since December 2018. Policy-wise, the release confirms that authorities put more emphasis on the reserves vs. the currency, which was allowed to move more freely and absorb some of the external shocks in the past two months.

    The geopolitical noise and President Tayyip Erdogan’s promise of more policy rate cuts are pulling the Turkish lira down this morning. U.S. President Donald Trump effectively gave the Turkish military a green light to move into Syria, saying that the Turkish government and the Kurds should sort out the situation by themselves. This follows President Erdogan's weekend comments that the military operation can start at any time. The currency’s trajectory could be an important consideration for the central bank, which is scheduled to hold its next rate-setting meeting on October 24. The market believes that the geopolitical spillovers would be contained and that the central bank would be able to lower its key rate by another 130bps before the end of the year.

    Chart at a Glance: Mexico Investments – Contraction Approaching Double Digits

    Line chart illustrating the contraction in Mexico gross fixed investments

    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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