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  • Emerging Markets Debt Daily

    More Rate Cuts in India Despite Higher Inflation

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    March 11, 2019
    India’s upside inflation surprise is not an impediment to further rate cuts. Dovish comments from the Philippine central bank affected the currency’s performance this morning.

    Today’s inflation data dump in emerging markets brought upside surprises in India and Romania, but showed that price pressures in Brazil remain well contained. Brazil’s yearly headline inflation edged up only slightly in February (3.89%), while several measures of core inflation moderated (together with the diffusion index1). It is hardly surprising that the market expects the central bank to stay on hold in the next six months. The upside inflation surprise in India was duly noted, but the headline print does not look high enough (below the target at 2.57% year-on-year) to prevent additional policy easing (19bps of which are currently in the price), especially against the backdrop of a soft industrial production growth.  
    The Philippine peso is not feeling well this morning following the central bank governor’s unexpectedly dovish remarks, which signal that the policy focus has shifted to growth. Governor Benjamin Diokno suggested that there is room for easing, which can be done in the form of quarterly 100bps reserve requirementcuts (for the next 12 months). Another factor that moved the currency was the governor’s comment that the central bank will not be intervening as long as the peso stays within the 52-55 range vs. U.S. dollar. As of this morning, the market was pricing in two full rate cuts in the Philippines in the next six months. 

    A downside inflation surprise in the U.S. gave a boost to stocks but pushed the dollar down against the euro. With both headline and core inflation below consensus in February, there are few reasons for the market to expect any changes in the Federal Reserve’s (Fed's) stance going into the next meeting. Friday’s comments by Federal Open Market Committee Chairman Jerome Powell point in the same direction (albeit we are very curious to know what the Fed thinks about the fairly brisk increase in its favorite inflation gauge, the 5-year forward breakeven inflation rate). 

    1Diffusion index is a measure of the degree to which different indicators change in the same way over a particular period of time.
    2The reserve requirement ratio is a central bank regulation, employed by most of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank.

    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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