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  • Emerging Markets Debt Daily

    Russia – Conservative Surprise

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 24, 2020

    Russia opts for a smaller rate cut, but maintains dovish guidance. Mexico’s activity contracts more than expected in May, complicating the policy outlook for the central bank.

    Russia’s central bank (CBR) reaffirmed its stellar policy credentials opting for a smaller than expected 25bps rate cut this morning. Caution abound (geopolitics, oil), but there are no signs that the CBR is about to exit from the accommodative policy stance. Forward guidance remained dovish, and the CBR also lowered its neutral rate estimate to 5-6%, which in theory leaves room for easing well into 2021.

    Higher inflation + Collapsing output = How much room left for rate cuts? This is an unenviable problem that Mexico’s central bank has to solve in the coming weeks. Economic activity contracted more than expected in May (-22.73% year-on-year), as the lockdowns continued. The services sector drove the decline, but manufacturing also remained weak. The consensus view is that we will see a sharp rebound once the restrictions are lifted (one counterargument here is that Mexico’ stimulus package was much more modest compared to EM peers). If this scenario were to materialize, the market might trim its near-term rate cut expectations.

    Brazil’s benign inflation is an argument in favor of one final rate cut in August. Mid-month inflation undershot consensus, staying close to all-time lows (2.13% year-on-year – see chart below). Brazil’s disinflation success is admirable, however it is a “tired” theme as regards investment implications. Tax reform can provide a new impetus in the future, but we are at the very beginning of the process and there will be a lot of ups and downs before we see any concrete results.

    Chart at a Glance: Brazil Inflation Backdrop Still Benign

    Chart at a Glance: Brazil Inflation Backdrop Still Benign

    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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