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  • Emerging Markets Debt Daily

    Russia Accelerates the Pace of Rate Cuts

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 25, 2019
     

    Russia opts for a more aggressive rate cut, as inflation and domestic activity remain soft. Argentina mulls tighter capital controls after the presidential elections.

    The Russian central bank (CBR) unexpectedly accelerated the pace of easing, delivering a 50bps policy rate cut today and leaving the door open for more. The CBR now believes that domestic activity can benefit from additional policy support, especially as the inflation outlook looks more benign and inflation expectations remain anchored. Even with today’s cut, Russia’s real policy rate is around 2.5%, which might be a bit too high for the real gross domestic product (GDP) growth of less than 1% (in Q3).

    Mexico’s latest retail sales print was not horrible—actually, we got a small upside surprise. However, there are still no signs of breakthrough and the yearly growth figure continues to oscillate around 2%. The release changes nothing in our assessment of the central bank’s response function. The room for easing is clearly there—inflation is gradually sliding down, investments are very weak (down by 7.6% year-on-year in July) and consumer confidence has deteriorated since February. The market expectation of 78bps of cuts in three months looks a bit ambitious, but the probability of another 25bps cut on November 14 is quite high.

    With the first round of Argentina’s presidential elections this weekend, the market maintains its focus on all things related to the country’s ability to honor its debt obligations. Yesterday’s headlines that the central bank might tighten capital controls after the elections were not particularly surprising. The current setup does not seem to be efficient—even though some capital controls are in place, the central bank continues to lose reserves at an alarming pace (34% down since early July).

    À propos: The pre-election atmosphere in Argentina is so tense, it’s practically purple. So, I wanted to share an uplifting story to prove that, yes, miracles do happen—even in Buenos Aires. The story comes from the world of movie-making, and it’s got to do with the “resurrection” of the legendary (and brilliant) Sci-Fi silent movie Metropolis, which was created in Germany in 1927. (If you haven’t a clue what I am talking about, then do have a look at Queen’s “Radio Ga Ga” official video clip, which uses footage from the movie). The movie’s premiere in Berlin was a disaster—it was too long and, apparently, too nerdy. So, it was hacked to pieces for the U.S. release, losing about an hour of running time. In subsequent decades, there were several attempts to restore Metropolis, but the results were disappointing. There were persistent rumors, however, that one complete, un-cut, copy had survived in Buenos Aires, taken there by an Argentine film distributor who was in Berlin at the time of its initial release. To cut (sorry!) a long story short, the badly damaged negative was eventually located in Argentina’s movie museum in 2008 and Metropolis was restored to its original glory several years later. So, I am going to watch the movie again (and listen to Freddie Mercury) this weekend, while I am waiting for the election results. I can only hope for an equally miraculous outcome for Argentina’s debt!

  • IMPORTANT DEFINITIONS & DISCLOSURES  

    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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