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  • Emerging Markets Debt Daily

    Questions Raised on LATAM Outlook

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 12, 2019

    Today’s activity releases in Latin America raise concerns about the region’s growth outlook. A big upside surprise in Czech inflation signals that the market may be underestimating the central bank’s hawkish resolve.

    The morning’s activity flow in Latin America raised questions about the regional growth outlook. The retail sales growth in Brazil slumped to a mere 0.6% year-on-year in December. Given that the labor market slack will continue weighing on private consumption, today’s release is a good argument against monetary tightening in 2019. It is also a good reason why the consensus is not in a hurry to raise its 2019 growth forecast. The capacity utilization1 decline in Argentina is simply stunning (at the lowest level since 2002! - see chart below). The print underscores challenges faced by President Mauricio Macri’s government in the run up to the presidential election, pointing to numerous potential delays in the expected “virtuous cycle”.

    As it turns out, Czech inflation was simply playing possum over the past few months. A surprisingly big jump in January (to 2.5% year-on-year) shows that it is very much alive, providing justification for the central bank’s hawkish tilt. The market barely prices in one full hike over the next 12 months, but today’s release shows that monetary authorities’ concerns about the tight labor market and its impact on the underlying price pressures are not misplaced. Another area closely watched by the central bank is the “pro-inflation” fiscal stance, which they believe mostly fuels household consumption.

    January’s inflation in the U.S. turned out a little more resilient than expected, giving some boost to the U.S. dollar in the morning trade. In particular, core inflation stayed unchanged at 2.2% year-on-year, and the monthly increase was stronger than in the previous months. A dismal industrial production print in the Eurozone (the lowest since 2009) cemented the market sentiment, signaling that there are very few reasons for the European Central Bank to turn hawkish any time soon.


    Chart at a Glance

    Argentina Industrial Capacity Utilization

    Source: Bloomberg LP

    1Capacity utilization measures the proportion of potential economic output that is actually realized.


    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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