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  • Emerging Markets Debt Daily

    More Concerns About Mexico

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

    Mexico’s rollercoaster continued this morning, reflecting conflicting headlines about U.S. tariffs and Pemex’s downgrade to “junk”. Lower inflation and privatization-friendly court decision in Brazil supported the currency in the morning trade.

    Mexico’s rollercoaster continued this morning
    . The country’s President Lopez Obrador expressed optimism that U.S. tariffs will be stopped, but the latest headlines suggest that the U.S. intends to move forward. Another unexpected development was Fitch’s downgrade of the state-owned oil giant Pemex to “junk” with a negative outlook, raising concerns about liquidations by investment grade index funds. Mexico’s better than expected inflation print was pretty much ignored – even though it showed slower price increases in the second half of May (bi-weekly headline inflation fell to 4.13% year-on-year), which should ease pressure on the central bank.  

    Good news in Brazil gave the currency extra support in the morning trade. First, the market appreciated the Supreme Court’s ruling that allows to privatize subsidiaries of state-owned companies without a congressional approval. Second, the inflation outlook remains benign. Yearly inflation surprised to the downside in May (to 4.66%), the diffusion indexdropped to 49.3%, and all measurements of core prices slowed down. In theory, this should give the central bank room to cut rates (soft domestic demand points in the same direction). However, monetary authorities also keep a close eye on the approval of the pension reform bill, and there is still a lot of uncertainty about fiscal savings and the timing of the vote in the lower house.

    The weak U.S. labor market report pushed the dollar down, but failed to generate a lot of excitement in emerging markets (EM). The main reason is that a big downside surprise in U.S. non-farm payrolls (mere 75k) strengthened concerns about the growth outlook. Even though EM activity surveys held on better than expected in May, it is hard to expect that this part of the world will remain unscathed if downside growth risks in the U.S. materialize.

    1Diffusion indices capture the share of total price changes that are either positive or negative.


    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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